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Employment Agreement - Bay Apartment Communities Inc. and Thomas J. Sargeant

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                              EMPLOYMENT AGREEMENT

         EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of
March, 1998 by and between Thomas J. Sargeant ("Executive") and Bay Apartment
Communities, Inc., a Maryland corporation (the "Company").

         WHEREAS, Executive and Avalon Properties, Inc. ("Avalon") have
previously entered into an Employment Agreement, dated as of April 4, 1997 (the
"Prior Agreement"); and

         WHEREAS, pursuant to the Agreement and Plan of Merger, by and between
the Company and Avalon, dated as of March_9, 1998 (the "Merger Agreement"),
Avalon will merge into the Company (the "Merger"); and

         WHEREAS, Executive and the Company desire to enter into a new
employment agreement, effective as of the consummation of the merger
contemplated by the Merger Agreement (the "Effective Date"), to replace the
Prior Agreement.

         NOW, THEREFORE, the parties hereto do hereby agree as follows.

1.       Term. Subject to the consummation of the merger contemplated by the
         Merger Agreement, the Company hereby agrees to employ Executive, and
         Executive hereby agrees to remain in the employ of the Company subject
         to the terms and conditions of this Agreement for the period
         commencing on the Effective Date and terminating on the third
         anniversary of the Effective Date (the "Original Term"), unless
         earlier terminated as provided in Section 7. The Original Term shall
         be extended automatically for additional 1 year periods (each a
         "Renewal Term"), unless notice that this Agreement will not be
         extended is given by either party to the other 6 months prior to the
         expiration of the Original Term or any Renewal Term. Notwithstanding
         the foregoing, upon a Change in Control, the Employment Period shall
         be extended automatically to 3 years from the date of such Change in
         Control. (The period of Executive's employment hereunder within the
         Original Term and any Renewal Terms is herein referred to as the
         "Employment Period.")

2.       Employment Duties.

         a.       During the Employment Period, Executive shall be employed in
                  the business of the Company and its affiliates. Executive
                  shall serve as a corporate officer of the Company with the
                  title of Senior Vice President-Chief Financial Officer.
                  Executive's duties and authority shall be commensurate with
                  his title and position with the Company, and shall not be
                  materially diminished from, or materially inconsistent with,
                  his primary duties and authority with Avalon immediately
                  prior to the date of this Agreement.
<PAGE>   2

         b.       Executive agrees to his employment as described in this
                  Section 2 and agrees to devote substantially all of his
                  working time and efforts to the performance of his duties
                  under this Agreement; provided that nothing herein shall be
                  interpreted to preclude Executive from (i) participating with
                  the prior written consent of the Board of Directors as an
                  officer or director of, or advisor to, any other entity or
                  organization that is not a customer or material service
                  provider to the Company or a Competing Enterprise, as defined
                  in Section 8, so long as such participation does not
                  interfere with the performance of Executive's duties
                  hereunder, whether or not such entity or organization is
                  engaged in religious, charitable or other community or
                  non-profit activities, (ii) investing in any entity or
                  organization which is not a customer or material service
                  provider to the Company or a Competing Enterprise, so long as
                  such investment does not interfere with the performance of
                  Executive's duties hereunder, or (iii) delivering lectures or
                  fulfilling speaking engagements so long as such lectures or
                  engagements do not interfere with the performance of
                  Executive's duties hereunder. The Company consents to
                  Executive's status as a "former partner" with a current
                  financial interest in certain Midwest projects of Trammell
                  Crow Residential ("TCR"), and such activity shall not be
                  treated as a Competing Enterprise.

         c.       In performing his duties hereunder, Executive shall be
                  available for reasonable travel as the needs of the business
                  require. Executive shall be based in Alexandria, VA or
                  otherwise in the greater Washington, D.C. metropolitan area.

         d.       Breach by either party of any of its respective obligations
                  under this Section 2 shall be deemed a material breach of
                  that party's obligations hereunder.

3.       Compensation/Benefits. In consideration of Executive's services
         hereunder, the Company shall provide Executive the following:

         a.       Base Salary. During the Employment Period, the Executive
                  shall receive an annual rate of base salary ("Base Salary")
                  in an amount not less than $270,000. Executive's Base Salary
                  will be reviewed by the Company as of the first anniversary
                  of the Effective Date, and may be adjusted upward (but not
                  downward) at such time to reflect any inequities in
                  compensation.  Commencing as of January 1, 2000, Executive's
                  Base Salary shall be reviewed no less frequently than
                  annually by the Company and may be adjusted upward (but not
                  downward) by the Company. Upon such annual review during the
                  Renewal Term, if any, Executive's Base Salary shall be
                  increased to the greatest of (i) an amount equal to Base
                  Salary for the prior year plus 5%, (ii) a factor measured by
                  the increase, if any, in the Consumer Price Index for Wage
                  Earners and Clerical Workers (CPI-W) (City Average for
                  Washington, D.C.-MD-VA 1982-84=100), as published by the
                  Bureau of Labor Statistics, for the prior calendar year (the
                  "CPI
<PAGE>   3
                  Adjustment") or (iii) such greater amount as may be agreed by
                  Executive and the Company. Base Salary shall be payable in
                  accordance with the Company's normal business practices, but
                  in no event less frequently than monthly.

         b.       Bonuses. Commencing at the close of each fiscal year during
                  the Employment Period, the Company shall review the
                  performance of the Company and of Executive during the prior
                  fiscal year, and the Company may provide Executive with
                  additional compensation as a bonus if the Board, or any
                  compensation committee hereof, in its discretion, determines
                  that Executive's contribution to the Company warrants such
                  additional payment and the Company's anticipated financial
                  performance of the present period permits such payment. The
                  bonuses hereunder shall be paid as a lump sum not later than
                  60 days after the end of the Company's preceding fiscal year.

         c.       Medical Insurance/Physical. During the Employment Period, the
                  Company shall provide to Executive and Executive's immediate
                  family a comprehensive policy of health insurance. During the
                  Employment Period, Executive shall be entitled to a
                  comprehensive annual physical performed, at the expense of
                  the Company by the physician or medical group of Executive's
                  choosing.

         d.       Life Insurance/Disability Insurance. During the Employment
                  Period, the Company shall keep in force and pay the premiums
                  on the split-dollar life insurance policy referenced in the
                  Split Dollar Insurance Agreement between Avalon and
                  Executive, subject to reimbursement by Executive as provided
                  in such Split Dollar Insurance Agreement. The Company shall
                  reimburse Executive for the cost of the comprehensive
                  disability insurance policy, which is in effect on January 1,
                  1997, and shall also be responsible for any increases in
                  premiums which become effective during the Employment Period
                  as may be necessary to maintain the same level of insurance
                  as in effect on January 1, 1997. Executive agrees to submit
                  to such medical examinations as may be required in order to
                  maintain such policies of insurance.

         e.       Vacations. Executive shall be entitled to reasonable paid
                  vacations during the Employment Period in accordance with the
                  then regular procedures of the Company governing executives,
                  not to exceed 6 weeks per annum, in the aggregate.

         f.       Office/Secretary, etc. During the Employment Period,
                  Executive shall be entitled to secretarial services and a
                  private office commensurate with his title and duties.

         g.       Avalon Stock Option. The Company acknowledges that,
                  notwithstanding the consummation of the Merger, Avalon
                  granted to Executive on March 8, 1998, a


<PAGE>   4


                  non-qualified employee stock option to purchase 91,110 shares
                  of common stock of Avalon, par value $.01 per share (the
                  "Avalon Stock Option"). The Avalon Stock Option was granted
                  at an exercise price equal to $28.8125. Upon termination of
                  Executive's employment, vesting and exercisability of the
                  Avalon Stock Option shall be governed by the terms of the
                  stock option agreement and this Agreement, as applicable.
                  During the Employment Period, Executive shall be eligible for
                  future employee stock option grants on the same basis as
                  other senior management of the Company.

         h.       Automobile. The Company shall provide Executive with a
                  monthly car allowance during the Employment Period of not
                  less than $750 per month (adjusted annually for inflation by
                  the CPI Adjustment); provided that, at Executive's election,
                  the Company may instead purchase or lease, and maintain
                  insurance for, an automobile of comparable value for use by
                  Executive, who shall be responsible for maintaining such
                  automobile, at his own expense, with the same standard of
                  care Executive applies to his own property and as may be
                  required under any applicable lease agreement.

         i.       Other Benefits. During the Employment Period, the Company
                  shall provide to Executive such other benefits, excluding
                  severance benefits, but including the right to participate in
                  such retirement or pension plans, as are made generally
                  available to executives of the Company from time to time, and
                  shall be given credit for purposes of eligibility and vesting
                  of employee benefits and benefit accrual for service with
                  Avalon, its affiliates and TCR prior to the Effective Date
                  under each benefit plan of the Company and its subsidiaries
                  to the extent such service had been credited under employee
                  benefit plans of Avalon and its subsidiaries, provided that
                  no such crediting of service results in duplication of
                  benefits.

4.       Expenses/Indemnification.

         a.       During the Employment Period, the Company shall reimburse
                  Executive for the reasonable business expenses incurred by
                  Executive in the course of performing his duties for the
                  Company hereunder, upon submission of invoices, vouchers or
                  other appropriate documentation, as may be required in
                  accordance with the policies in effect from time to time for
                  executive employees of the Company.

         b.       To the fullest extent permitted by law, the Company shall
                  indemnify Executive with respect to any actions commenced
                  against Executive in his capacity as an officer or director
                  or former officer or director of the Company, or any
                  affiliate thereof for which he may render service in such
                  capacity, whether by or on behalf of the Company, its
                  shareholders or third parties, and the Company shall advance


<PAGE>   5


                  to Executive on a timely basis an amount equal to the
                  reasonable fees and expenses incurred in defending such
                  actions, after receipt of an itemized request for such
                  advance, and an undertaking from Executive to repay the
                  amount of such advance, with interest at a reasonable rate
                  from the date of the request, as determined by the Company,
                  if it shall ultimately be determined that he is not entitled
                  to be indemnified against such expenses. The Company agrees
                  to use its best efforts to secure and maintain officers and
                  directors' liability insurance with respect to Executive.

5.       Employer's Authority/Policies.

         a.       General. Executive agrees to observe and comply with the
                  rules and regulations of the Company as adopted by its Board
                  respecting the performance of his duties and to carry out and
                  perform orders, directions and policies communicated to him
                  from time to time by the Board.

         b.       Ethics Policies. Executive agrees to comply with and be bound
                  by the Ethics Policies of the Company, as reflected in the
                  attachment at Annex A hereto and made a part hereof.

6.       Records/Nondisclosure/Company Policies.

         a.       General. All records, financial statements and similar
                  documents obtained, reviewed or compiled by Executive in the
                  course of the performance by him of services for the Company,
                  whether or not confidential information or trade secrets,
                  shall be the exclusive property of the Company. Executive
                  shall have no rights in such documents upon any termination
                  of this Agreement.

         b.       Nondisclosure Agreement. Without limitation of the Company's
                  rights under Section 6(a), Executive agrees to abide by and
                  be bound by the Nondisclosure Agreement of the Company
                  executed by Executive and the Company as reflected in the
                  attachment at Annex B and made a part hereof.

7.       Termination; Severance and Related Matters.

         a.       At-Will Employment. Executive's employment hereunder is "at
                  will" and, therefore, may be terminated at any time, with or
                  without Cause, at the option of the Company, subject only to
                  the severance obligations under this Section 7. Upon any
                  termination hereunder, the Employment Period shall expire.

         b.       Definitions. For purposes of this Section 7, the following
                  terms shall have the indicated definitions:



<PAGE>   6


                  i.       Cause. "Cause" shall mean:

                           (1)      Executive is convicted of or enters a plea
                                    of nolo contendere to an act which is
                                    defined as a felony under any federal,
                                    state or local law, not based upon a
                                    traffic violation, which conviction or plea
                                    has or can be expected to have, in the good
                                    faith opinion of the Board of Directors, a
                                    material adverse impact on the business or
                                    reputation of the Company;

                           (2)      any one or more acts of theft, larceny,
                                    embezzlement, fraud or material intentional
                                    misappropriation from or with respect to
                                    the Company;

                           (3)      a breach by Executive of his fiduciary
                                    duties under Maryland law as an officer;

                           (4)      Executive's commission of any one or more
                                    acts of gross negligence or willful
                                    misconduct which in the good faith opinion
                                    of the Board of Directors has resulted in
                                    material harm to the business or reputation
                                    of the Company; or

                           (5)      default by Executive in the performance of
                                    his material duties under this Agreement,
                                    without correction of such action within 15
                                    days of written notice thereof.

         Notwithstanding the foregoing, no termination of Executive's
employment by the Company shall be treated as for Cause or be effective until
and unless all of the steps described in subparagraphs (i) through (iii) below
have been complied with:

i.Notice of intention to terminate for Cause has been given by the Company
within 120 days after the Board of Directors learns of the act, failure or
event (or latest in a series of acts, failures or events) constituting "Cause";

ii.The Board of Directors has voted (at a meeting of the Board of Directors
duly called and held as to which termination of Executive is an agenda item) to
terminate Executive for Cause after Executive has been given notice of the
particular acts or circumstances which are the basis for the termination for
Cause and has been afforded at least 20 days notice after the meeting and an
opportunity to present his position in writing; and

iii.The Board of Directors has given a Notice of Termination to Executive
within 20 days of such Board meeting.


<PAGE>   7

         The Company may suspend Executive with pay at any time during the
period commencing with the giving of notice to Executive under clause (i) above
until final Notice of Termination is given under clause (iii) above. Upon the
giving of notice as provided in clause (iii) above, no further payments shall
be due Executive.

                  ii.      Change in Control. A "Change in Control" shall mean
                           the occurrence of any one or more of the following
                           events following the Effective Date:

                           (1)      Any individual, entity or group (a
                                    "Person") within the meaning of Sections
                                    13(d) and 14(d) of the Securities Exchange
                                    Act of 1934 (the "Act") (other than the
                                    Company, any corporation, partnership,
                                    trust or other entity controlled by the
                                    Company (a "Subsidiary"), or any trustee,
                                    fiduciary or other person or entity holding
                                    securities under any employee benefit plan
                                    or trust of the Company or any of its
                                    Subsidiaries), together with all
                                    "affiliates" and "associates" (as such
                                    terms are defined in Rule 12b-2 under the
                                    Act) of such Person, shall become the
                                    "beneficial owner" (as such term is defined
                                    in Rule 13d-3 under the Act) of securities
                                    of the Company representing 30% or more of
                                    the combined voting power of the Company's
                                    then outstanding securities having the
                                    right to vote generally in an election of
                                    the Company's Board of Directors ("Voting
                                    Securities"), other than as a result of (A)
                                    an acquisition of securities directly from
                                    the Company or any Subsidiary or (B) an
                                    acquisition by any corporation pursuant to
                                    a reorganization, consolidation or merger
                                    if, following such reorganization,
                                    consolidation or merger the conditions
                                    described in clauses (A), (B) and (C) of
                                    subparagraph (iii) of this Section 7(b)(2)
                                    are satisfied; or

                           (2)      Individuals who, as of the Effective Date,
                                    constitute the Company's Board of Directors
                                    (the "Incumbent Directors") cease for any
                                    reason to constitute at least a majority of
                                    the Board, provided, however, that any
                                    individual becoming a director of the
                                    Company subsequent to the date hereof
                                    (excluding, for this purpose, (A) any such
                                    individual whose initial assumption of
                                    office is in connection with an actual or
                                    threatened election contest relating to the
                                    election of members of the Board of
                                    Directors or other actual or threatened
                                    solicitation of proxies or consents by or
                                    on behalf of a Person other than the Board
                                    of Directors, including by reason of
                                    agreement intended to avoid or settle any
                                    such actual or threatened contest or
                                    solicitation, and (B) any individual whose
                                    initial assumption of office is in
                                    connection with a reorganization,




<PAGE>   8

                                    merger or consolidation, involving an
                                    unrelated entity and occurring during the
                                    Employment Period), whose election or
                                    nomination for election by the Company's
                                    shareholders was approved by a vote of at
                                    least a majority of the persons then
                                    comprising Incumbent Directors shall for
                                    purposes of this Agreement be considered an
                                    Incumbent Director; or

                           (3)      Consummation of a reorganization, merger or
                                    consolidation of the Company, unless,
                                    following such reorganization, merger or
                                    consolidation, (A) more than 50% of,
                                    respectively, the then outstanding shares
                                    of common stock of the corporation
                                    resulting from such reorganization, merger
                                    or consolidation and the combined voting
                                    power of the then outstanding voting
                                    securities of such corporation entitled to
                                    vote generally in the election of directors
                                    is then beneficially owned, directly or
                                    indirectly, by all or substantially all of
                                    the individuals and entities who were the
                                    beneficial owners, respectively, of the
                                    outstanding Voting Securities immediately
                                    prior to such reorganization, merger or
                                    consolidation, (B) no Person (excluding the
                                    Company, any employee benefit plan (or
                                    related trust) of the Company, a Subsidiary
                                    or the corporation resulting from such
                                    reorganization, merger or consolidation or
                                    any subsidiary thereof, and any Person
                                    beneficially owning, immediately prior to
                                    such reorganization, merger or
                                    consolidation, directly or indirectly, 30%
                                    or more of the outstanding Voting
                                    Securities), beneficially owns, directly or
                                    indirectly, 30% or more of, respectively,
                                    the then outstanding shares of common stock
                                    of the corporation resulting from such
                                    reorganization, merger or consolidation or
                                    the combined voting power of the then
                                    outstanding voting securities of such
                                    corporation entitled to vote generally in
                                    the election of directors, and (C) at least
                                    a majority of the members of the board of
                                    directors of the corporation resulting from
                                    such reorganization, merger or
                                    consolidation were members of the Incumbent
                                    Board at the time of the execution of the
                                    initial agreement providing for such
                                    reorganization, merger or consolidation;

                           (4)      Approval by the shareholders of the Company
                                    of a complete liquidation or dissolution of
                                    the Company; or

                           (5)      The sale, lease, exchange or other
                                    disposition of all or substantially all of
                                    the assets of the Company, other than to a
                                    corporation, with respect to which
                                    following such sale, lease, exchange or
                                    other



<PAGE>   9

                                    disposition (A) more than 50% of,
                                    respectively, the then outstanding shares
                                    of common stock of such corporation and the
                                    combined voting power of the then
                                    outstanding voting securities of such
                                    corporation entitled to vote generally in
                                    the election of directors is then
                                    beneficially owned, directly or indirectly,
                                    by all or substantially all of the
                                    individuals and entities who were the
                                    beneficial owners of the outstanding Voting
                                    Securities immediately prior to such sale,
                                    lease, exchange or other disposition, (B)
                                    no Person (excluding the Company and any
                                    employee benefit plan (or related trust) of
                                    the Company or a Subsidiary or such
                                    corporation or a subsidiary thereof and any
                                    Person beneficially owning, immediately
                                    prior to such sale, lease, exchange or
                                    other disposition, directly or indirectly,
                                    30% or more of the outstanding Voting
                                    Securities), beneficially owns, directly or
                                    indirectly, 30% or more of, respectively,
                                    the then outstanding shares of common stock
                                    of such corporation and the combined voting
                                    power of the then outstanding voting
                                    securities of such corporation entitled to
                                    vote generally in the election of directors
                                    and (C) at least a majority of the members
                                    of the board of directors of such
                                    corporation were members of the Incumbent
                                    Board at the time of the execution of the
                                    initial agreement or action of the Board of
                                    Directors providing for such sale, lease,
                                    exchange or other disposition of assets of
                                    the Company.

         Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred for purposes of this Agreement solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Voting Securities outstanding, increases the proportionate voting
power represented by the Voting Securities beneficially owned by any Person to
30% or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any Person referred to in this sentence
shall thereafter become the beneficial owner of any additional shares of Stock
or other Voting Securities (other than pursuant to a stock split, stock
dividend, or similar transaction), then a "Change in Control" shall be deemed
to have occurred for purposes of this Agreement.

                  iii.     Complete Change in Control. A "Complete Change in
                           Control" shall mean that a Change in Control has
                           occurred, after modifying the definition of "Change
                           in Control" by deleting clause (i) from Section
                           7(b)(2) of this Agreement.

                  iv.      Constructive Termination Without Cause.
                           "Constructive Termination Without Cause" shall mean
                           a termination of Executive's employment initiated by
                           Executive not later than 12 months following the
                           occurrence





<PAGE>   10

                           (not including any time during which an arbitration
                           proceeding referenced below is pending), without
                           Executive's prior written consent, of one or more of
                           the following events (or the latest to occur in a
                           series of events), and effected after giving the
                           Company not less than 10 working days' written
                           notice of the specific act or acts relied upon and
                           right to cure:

                           (1)      a material adverse change in the functions,
                                    duties or responsibilities of Executive's
                                    position which would reduce the level,
                                    importance or scope of such position; or
                                    any removal of Executive from or failure to
                                    reappoint or reelect Executive to any
                                    position set forth in this Agreement,
                                    except in connection with the termination
                                    of Executive's employment for Disability,
                                    Cause, as a result of Executive's death or
                                    by Executive other than for a Constructive
                                    Termination Without Cause;

                           (2)      any material breach by the Company of this
                                    Agreement;

                           (3)      any purported termination of Executive's
                                    employment for Cause by the Company which
                                    does not comply with the terms of Section
                                    7(b)(1) of this Agreement;

                           (4)      the failure of the Company to obtain an
                                    agreement, satisfactory to the Executive,
                                    from any successor or assign of the
                                    Company, to assume and agree to perform
                                    this Agreement, as contemplated in Section
                                    10 of this Agreement;

                           (5)      the failure by the Company to continue in
                                    effect any compensation plan in which
                                    Executive participates immediately prior to
                                    a Change in Control which is material to
                                    Executive's total compensation, unless
                                    comparable alternative arrangements
                                    (embodied in ongoing substitute or
                                    alternative plans) have been implemented
                                    with respect to such plans, or the failure
                                    by the Company to continue Executive's
                                    participation therein (or in such
                                    substitute or alternative plans) on a basis
                                    not materially less favorable, in terms of
                                    the amount of benefits provided and the
                                    level of Executive's participation relative
                                    to other participants, as existed during
                                    the last completed fiscal year of the
                                    Company prior to the Change in Control;

                           (6)      the relocation of the Company's Alexandria
                                    offices to a new location more than fifty
                                    (50) miles from Alexandria or the failure
                                    to locate Executive's own office at the
                                    Alexandria office (or at the





<PAGE>   11

                                    office to which such office is relocated
                                    which is within 50 miles of Alexandria) or,
                                    following a Change in Control, the failure
                                    to locate Executive's office at the
                                    Company's principal executive office or the
                                    relocation of the Company's principal
                                    executive office to a location more than 50
                                    miles from Alexandria; or

                           (7)      any termination of employment by the
                                    Executive for any reason during the
                                    12-month period immediately following a
                                    Complete Change in Control of the Company.

Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party
and Executive's and the Company's rights and obligations under this Agreement
shall continue unaffected unless and until the arbitrator has determined such
question in the affirmative, or, if earlier, the date on which Executive or the
Company has delivered a Notice of Termination in accordance with the provisions
of this Agreement.

                  v.       Covered Average Compensation. "Covered Average
                           Compensation" shall mean the sum of Executive's
                           Covered Compensation as calculated for the calendar
                           year in which the Date of Termination occurs and for
                           each of the two preceding calendar years, divided by
                           three.

                  vi.      Covered Compensation. "Covered Compensation," for
                           any calendar year, shall mean an amount equal to the
                           sum of (i) Executive's Base Salary for the calendar
                           year (disregarding any decreases made effective
                           during the Employment Period), (ii) the cash bonus
                           actually earned by Executive with respect to such
                           calendar year, and (iii) the value of all stock and
                           other equity-based compensation awards made to
                           Executive during such calendar year.

                  Covered Compensation shall be calculated according to the
                  following rules:

                                    (a)      In valuing awards for purposes of
                                             clause (iii) above, all such
                                             awards shall be treated as if
                                             fully vested when granted,



<PAGE>   12

                                             stock grants shall be valued by
                                             reference to the fair market value
                                             on the date of grant of the
                                             Company's common stock, par value
                                             $.01 per share (or of the common
                                             stock of Avalon, as the case may
                                             be) and other equity-based
                                             compensation awards shall be
                                             valued at the value established by
                                             the Compensation Committee of the
                                             Board of Directors on the date of
                                             grant.

                                    (b)      In determining the cash bonus
                                             actually paid with respect to a
                                             calendar year, if no cash bonus
                                             has been paid with respect to the
                                             calendar year in which the Date of
                                             Termination occurs, the cash bonus
                                             paid with respect to the
                                             immediately preceding calendar
                                             year shall be assumed to have been
                                             paid in each of the current and
                                             immediately preceding calendar
                                             years, and if no cash bonus has
                                             been paid by the Date of
                                             Termination with respect to the
                                             immediately preceding calendar
                                             year, the cash bonus paid with
                                             respect to the second preceding
                                             calendar year shall be assumed to
                                             have been paid in all three of the
                                             calendar years taken into account
                                             in determining Covered Average
                                             Compensation.

                                    (c)      If any cash bonus paid with
                                             respect to the current or
                                             immediately preceding calendar
                                             year was paid within three months
                                             of Executive's Date of
                                             Termination, and is lower than the
                                             last cash bonus paid more than
                                             three months from the Date of
                                             Termination, any such cash bonus
                                             paid within three months of the
                                             Date of Termination shall be
                                             disregarded and the last cash
                                             bonus paid more than three months
                                             from the Date of Termination shall
                                             be substituted for each cash bonus
                                             so disregarded.

                                    (d)      In determining the amount of stock
                                             and other equity-based
                                             compensation awards made during a
                                             calendar year during the averaging
                                             period, rules similar to those set
                                             forth in subparagraphs (B) and (C)
                                             of this Section 7(b)(6) shall be
                                             followed, except that all awards
                                             made in connection with the
                                             Company's initial public offering
                                             shall be disregarded.

                  vii.     Disability. "Disability" shall mean Executive has
                           been determined to be disabled and to qualify for
                           long-term disability benefits under the long-term
                           disability insurance policy obtained pursuant to
                           Section 3(d) of this Agreement.




<PAGE>   13

         c.       Rights Upon Termination.

                           (1)      Payment of Benefits Earned Through Date of
                                    Termination. Upon any termination of
                                    Executive's employment during the
                                    Employment Period, Executive, or his
                                    estate, shall in all events be paid all
                                    accrued but unpaid Base Salary and all
                                    earned but unpaid cash incentive
                                    compensation earned through his Date of
                                    Termination. Executive shall also retain
                                    all such rights with respect to vested
                                    equity-based awards as are provided under
                                    the circumstances under the applicable
                                    grant or award agreement, and shall be
                                    entitled to all other benefits which are
                                    provided under the circumstances in
                                    accordance with the provisions of the
                                    Company's generally applicable employee
                                    benefit plans, practices and policies,
                                    other than severance plans.

                           (2)      Death. In the event of Executive's death
                                    during the Employment Period, the Company
                                    shall, in addition to paying the amounts
                                    set forth in Section 7(c)(i), take whatever
                                    action is necessary to cause all of
                                    Executive's unvested equity-based awards to
                                    become fully vested as of the date of death
                                    and, in the case of equity-based awards
                                    which have an exercise schedule, to become
                                    fully exercisable and continue to be
                                    exercisable for such period as is provided
                                    in the case of vested and exercisable
                                    awards in the event of death under the
                                    terms of the applicable award agreements.

                           (3)      Disability. In the event the Company elects
                                    to terminate Executive's employment during
                                    the Employment Period on account of
                                    Disability, the Company shall, in addition
                                    to paying the amounts set forth in Section
                                    7(c)(i), pay to Executive, in one lump sum,
                                    no later than 31 days following the Date of
                                    Termination, an amount equal to two times
                                    Covered Average Compensation. The Company
                                    shall also, commencing upon the Date of
                                    Termination:

                                    (a)      Continue, without cost to
                                             Executive, benefits comparable to
                                             the medical and disability
                                             benefits provided to Executive
                                             immediately prior to the Date of
                                             Termination under Section 3(c) and
                                             Section 3(d) for a period of 24
                                             months following the Date of
                                             Termination or until such earlier
                                             date as Executive obtains
                                             comparable benefits through other
                                             employment;

                                    (b)      Continue to pay, or reimburse
                                             Executive, for all premiums



<PAGE>   14

                                             then due or thereafter payable on
                                             the whole-life portion of the
                                             split-dollar insurance policy
                                             referenced under Section 3(d) for
                                             so long as such payments are due;
                                             and

                                    (c)      Take whatever action is necessary
                                             to cause Executive to become
                                             vested as of the Date of
                                             Termination in all stock options,
                                             restricted stock grants, and all
                                             other equity-based awards and be
                                             entitled to exercise and continue
                                             to exercise all stock options and
                                             all other equity-based awards
                                             having an exercise schedule and to
                                             retain such grants and awards to
                                             the same extent as if they were
                                             vested upon termination of
                                             employment in accordance with
                                             their terms.

                           (4)      Non-Renewal. In the event the Company gives
                                    Executive a notice of non-renewal pursuant
                                    to Section 1 above, the Company shall, in
                                    addition to paying the amounts set forth in
                                    Section 7(c)(i), commencing upon the Date
                                    of Termination:

                                    (a)      Pay to Executive, for 12
                                             consecutive months, commencing
                                             with the first day of the month
                                             immediately following the Date of
                                             Termination, a monthly amount
                                             equal to the result obtained by
                                             dividing Covered Average
                                             Compensation by twelve;

                                    (b)      Continue, without cost to
                                             Executive, benefits comparable to
                                             the medical and disability
                                             benefits provided to Executive
                                             immediately prior to the Date of
                                             Termination under Section 3(c) and
                                             Section 3(d) for a period of 24
                                             months following the Date of
                                             Termination or until such earlier
                                             date as Executive obtains
                                             comparable benefits through other
                                             employment; and

                                    (c)      Take whatever action is necessary
                                             to cause Executive to become
                                             vested as of the Date of
                                             Termination in all stock options,
                                             restricted stock grants, and all
                                             other equity-based awards and be
                                             entitled to exercise and continue
                                             to exercise all stock options and
                                             all other equity-based awards
                                             having an exercise schedule and to
                                             retain such grants and awards to
                                             the same extent as if they were
                                             vested upon termination of
                                             employment in accordance with
                                             their terms; and

                                    (d)      Continue to pay, or reimburse
                                             Executive for, all premiums



<PAGE>   15
                                             then due or thereafter payable on
                                             the whole-life portion of the
                                             split-dollar insurance policy
                                             referenced under Section 3(d) for
                                             so long as such payments are due.

                           (5)      Termination Without Cause; Constructive
                                    Termination Without Cause. In the event the
                                    Company or any successor to the Company
                                    terminates Executive's employment without
                                    Cause, or if Executive terminates his
                                    employment in a Constructive Termination
                                    without Cause, the Company shall, in
                                    addition to paying the amounts provided
                                    under Section 7(c)(i), pay to Executive, in
                                    one lump sum no later than 31 days
                                    following the Date of Termination, an
                                    amount equal to three times Covered Average
                                    Compensation.  The Company shall also,
                                    commencing upon the Date of Termination:

                                    (a)      Continue, without cost to
                                             Executive, benefits comparable to
                                             the medical and disability
                                             benefits provided to Executive
                                             immediately prior to the Date of
                                             Termination under Section 3(c) and
                                             Section 3(d) for a period of 36
                                             months following the Date of
                                             Termination or until such earlier
                                             date as Executive obtains
                                             comparable benefits through other
                                             employment;

                                    (b)      Continue to pay, or reimburse
                                             Executive, for so long as such
                                             payments are due, all premiums
                                             then due or payable on the
                                             whole-life portion of the
                                             split-dollar insurance policy
                                             referenced under Section 3(d); and

                                    (c)      Take whatever action is necessary
                                             to cause Executive to become
                                             vested as of the Date of
                                             Termination in all stock options,
                                             restricted stock grants, and all
                                             other equity-based awards and be
                                             entitled to exercise and continue
                                             to exercise all stock options and
                                             all other equity-based awards
                                             having an exercise schedule and to
                                             retain such grants and awards to
                                             the same extent as if they were
                                             vested upon termination of
                                             employment in accordance with
                                             their terms.

                           (6)      Termination for Cause; Voluntary
                                    Resignation. In the event Executive's
                                    employment terminates during the Employment
                                    Period other than in connection with a
                                    termination meeting the conditions of
                                    subparagraphs (ii), (iii), (iv), or (v) of
                                    this Section 7(c), Executive shall receive
                                    the amounts set forth in Section 7(c)(i) in
                                    full satisfaction of all of his
                                    entitlements from the Company. All



<PAGE>   16


                                    equity-based awards not vested as of the
                                    Date of Termination shall terminate (unless
                                    otherwise provided in the applicable award
                                    agreement) and Executive shall have no
                                    further entitlements with respect thereto.

         d.       Additional Benefits.

                           (1)      Anything in this Agreement to the contrary
                                    notwithstanding, in the event it shall be
                                    determined that any payment or distribution
                                    by the Company to or for the benefit of
                                    Executive, whether paid or payable or
                                    distributed or distributable (1) pursuant
                                    to the terms of Section 7 of this
                                    Agreement, (2) pursuant to or in connection
                                    with any compensatory or employee benefit
                                    plan, agreement or arrangement, including
                                    but not limited to any stock options,
                                    restricted or unrestricted stock grants
                                    issued to or for the benefit of Executive
                                    and forgiveness of any loans by the Company
                                    to Executive or (3) otherwise
                                    (collectively, "Severance Payments"), would
                                    be subject to the excise tax imposed by
                                    Section 4999 of the Internal Revenue Code
                                    of 1986, as amended (the "Code"), and any
                                    interest or penalties are incurred by
                                    Executive with respect to such excise tax
                                    (such excise tax, together with any such
                                    interest and penalties, are hereinafter
                                    collectively referred to as the "Excise
                                    Tax"), then Executive shall be entitled to
                                    receive an additional payment (a "Partial
                                    Gross-Up Payment"), such that the net
                                    amount retained by Executive, before
                                    accrual or payment of any Federal, state or
                                    local income tax or employment tax, but
                                    after accrual or payment of the Excise Tax
                                    attributable to the Partial Gross-Up
                                    Payment, is equal to the Excise Tax on the
                                    Severance Payments.

                           (2)      Subject to the provisions of Section
                                    7(d)(iii), all determinations required to
                                    be made under this Section 7, including
                                    whether a Partial Gross-Up Payment is
                                    required and the amount of such Partial
                                    Gross-Up Payment, shall be made by Coopers
                                    & Lybrand LLP or such other nationally
                                    recognized accounting firm as may at that
                                    time be the Company's independent public
                                    accountants immediately prior to the Change
                                    in Control (the "Accounting Firm"), which
                                    shall provide detailed supporting
                                    calculations both to the Company and
                                    Executive within 15 business days of the
                                    Date of Termination, if applicable, or at
                                    such earlier time as is reasonably
                                    requested by the Company or Executive. The
                                    initial Partial Gross-Up Payment, if any,
                                    as determined pursuant to this Section
                                    7(d)(ii), shall be paid to Executive within
                                    five days of the


<PAGE>   17

                                    receipt of the Accounting Firm's
                                    determination. If the Accounting Firm
                                    determines that no Excise Tax is payable by
                                    Executive, the Company shall furnish
                                    Executive with an opinion of counsel that
                                    failure to report the Excise Tax on
                                    Executive's applicable federal income tax
                                    return would not result in the imposition
                                    of a negligence or similar penalty. Any
                                    determination by the Accounting Firm shall
                                    be binding upon the Company and Executive.
                                    As a result of the uncertainty in the
                                    application of Section 4999 of the Code at
                                    the time of the initial determination by
                                    the Accounting Firm hereunder, it is
                                    possible that Partial Gross-Up Payments
                                    which will not have been made by the
                                    Company should have been made (an
                                    "Underpayment"). In the event that the
                                    Company exhausts its remedies pursuant to
                                    Section 7(d)(iii) and Executive thereafter
                                    is required to make a payment of any Excise
                                    Tax, the Accounting Firm shall determine
                                    the amount of the Underpayment that has
                                    occurred, consistent with the calculations
                                    required to be made hereunder, and any such
                                    Underpayment, and any interest and
                                    penalties imposed on the Underpayment and
                                    required to be paid by Executive in
                                    connection with the proceedings described
                                    in Section 7(d)(iii), and any related legal
                                    and accounting expenses, shall be promptly
                                    paid by the Company to or for the benefit
                                    of Executive.

                           (3)      Executive shall notify the Company in
                                    writing of any claim by the Internal
                                    Revenue Service that, if successful, would
                                    require the payment by the Company of the
                                    Partial Gross-Up Payment. Such notification
                                    shall be given as soon as practicable but
                                    no later than 10 business days after
                                    Executive knows of such claim and shall
                                    apprise the Company of the nature of such
                                    claim and the date on which such claim is
                                    requested to be paid.  Executive shall not
                                    pay such claim prior to the expiration of
                                    the 30-day period following the date on
                                    which he gives such notice to the Company
                                    (or such shorter period ending on the date
                                    that any payment of taxes with respect to
                                    such claim is due).  If the Company
                                    notifies Executive in writing prior to the
                                    expiration of such period that it desires
                                    to contest such claim, Executive shall:

                                    (a)      give the Company any information
                                             reasonably requested by the
                                             Company relating to such claim,

                                    (b)      take such action in connection
                                             with contesting such claim as the
                                             Company shall reasonably request
                                             in writing from



<PAGE>   18

                                             time to time, including, without
                                             limitation, accepting legal
                                             representation with respect to
                                             such claim by an attorney selected
                                             by the Company,

                                    (c)      cooperate with the Company in good
                                             faith in order effectively to
                                             contest such claim, and

                                    (d)      permit the Company to participate
                                             in any proceedings relating to
                                             such claim; provided, however that
                                             the Company shall bear and pay
                                             directly all costs and expenses
                                             attributable to the failure to pay
                                             the Excise Tax (including related
                                             additional interest and penalties)
                                             incurred in connection with such
                                             contest and shall indemnify and
                                             hold Executive harmless, for any
                                             Excise Tax up to an amount not
                                             exceeding the Partial Gross-Up
                                             Payment, including interest and
                                             penalties with respect thereto,
                                             imposed as a result of such
                                             representation, and payment of
                                             related legal and accounting costs
                                             and expenses (the "Indemnification
                                             Limit"). Without limitation on the
                                             foregoing provisions of this
                                             Section 7(d)(iii), the Company
                                             shall control all proceedings
                                             taken in connection with such
                                             contest and, at its sole option
                                             may pursue or forego any and all
                                             administrative appeals,
                                             proceedings, hearings and
                                             conferences with the taxing
                                             authority in respect of such claim
                                             and may, at its sole option,
                                             either direct Executive to pay the
                                             tax claimed and sue for a refund
                                             or contest the claim in any
                                             permissible manner, and Executive
                                             agrees to prosecute such contest
                                             to a determination before any
                                             administrative tribunal, in a
                                             court of initial jurisdiction and
                                             in one or more appellate courts,
                                             as the Company shall determine;
                                             provided, however, that if the
                                             Company directs Executive to pay
                                             such claim and sue for a refund,
                                             the Company shall advance so much
                                             of the amount of such payment as
                                             does not exceed the Excise Tax,
                                             and related interest and
                                             penalties, to Executive on an
                                             interest-free basis and shall
                                             indemnify and hold Executive
                                             harmless, from any related legal
                                             and accounting costs and expenses,
                                             and from any Excise Tax, including
                                             related interest or penalties
                                             imposed with respect to such
                                             advance or with respect to any
                                             imputed income with respect to
                                             such advance up to an amount not
                                             exceeding the Indemnification
                                             Limit; and further provided that
                                             any extension of the statute of



<PAGE>   19


                                             limitations relating to payment of
                                             taxes for the taxable year of
                                             Executive with respect to which
                                             such contested amount is claimed
                                             to be due is limited solely to
                                             such contested amount.
                                             Furthermore, the Company's control
                                             of the contest shall be limited to
                                             issues with respect to which a
                                             Partial Gross-Up Payment would be
                                             payable hereunder and Executive
                                             shall be entitled to settle or
                                             contest, as the case may be, any
                                             other issues raised by the
                                             Internal Revenue Service or any
                                             other taxing authority.

                           (4)      If, after the receipt by Executive of an
                                    amount advanced by the Company pursuant to
                                    Section 7(d)(iii), Executive becomes
                                    entitled to receive any refund with respect
                                    to such claim, Executive shall (subject to
                                    the Company's complying with the
                                    requirements of Section 7(d)(iii)) promptly
                                    pay to the Company so much of such refund
                                    (together with any interest paid or
                                    credited thereon after taxes applicable
                                    thereto) (the "Refund") as is equal to (A)
                                    if the Company advanced or paid the entire
                                    amount required to be so advanced or paid
                                    pursuant to Section 7(d)(iii) hereof (the
                                    "Required Section 7(d) Advance"), the
                                    aggregate amount advanced or paid by the
                                    Company pursuant to this Section 7(d) less
                                    the portion of such amount advanced to
                                    Executive to reimburse him for related
                                    legal and accounting costs, or (B) if the
                                    Company advanced or paid less than the
                                    Required Section 7(d) Advance, so much of
                                    the aggregate amount so advanced or paid by
                                    the Company pursuant to this Section 7(d)
                                    as is equal to the difference, if any,
                                    between (C) the amount refunded to
                                    Executive with respect to such claim and
                                    (D) the sum of the portion of the Required
                                    Section 7(d) Advance that was paid by
                                    Executive and not paid or advanced by the
                                    Company plus Executive's related legal and
                                    accounting fees, as applicable. If, after
                                    the receipt by Executive of an amount
                                    advanced by the Company pursuant to Section
                                    7(d)(iii), a determination is made that
                                    Executive shall not be entitled to any
                                    refund with respect to such claim and the
                                    Company does not notify Executive in
                                    writing of its intent to contest such
                                    denial of refund prior to the expiration of
                                    30 days after such determination, then such
                                    advance shall be forgiven and shall not be
                                    required to be repaid and the amount of
                                    such advance shall offset, to the extent
                                    thereof, the amount of Partial Gross-Up
                                    Payment required to be paid.

                  e.       Notice of Termination. Notice of non-renewal of this
                           Agreement pursuant to



<PAGE>   20
                           Section 1 hereof or of any termination of
                           Executive's employment (other than by reason of
                           death) shall be communicated by written notice (a
                           "Notice of Termination") from one party hereto to
                           the other party hereto in accordance with this
                           Section 7 and Section 9.

                  f.       Date of Termination. "Date of Termination," with
                           respect to any termination of Executive's employment
                           during the Employment Period, shall mean (i) if
                           Executive's employment is terminated for Disability,
                           30 days after Notice of Termination is given
                           (provided that Executive shall not have returned to
                           the full-time performance of Executive's duties
                           during such 30 day period), (ii) if Executive's
                           employment is terminated for Cause, the date on
                           which a Notice of Termination is given which
                           complies with the requirements of Section 7(b)(1)
                           hereof, and (iii) if Executive's employment is
                           terminated for any other reason, the date specified
                           in the Notice of Termination. In the case of a
                           termination by the Company other than for Cause, the
                           Date of Termination shall not be less than 30 days
                           after the Notice of Termination is given. In the
                           case of a termination by Executive, the Date of
                           Termination shall not be less than 15 days from the
                           date such Notice of Termination is given.
                           Notwithstanding the foregoing, in the event that
                           Executive gives a Notice of Termination to the
                           Company, the Company may unilaterally accelerate the
                           Date of Termination and such acceleration shall not
                           result in the termination being treated as a
                           Termination without Cause. Upon any termination of
                           his employment, Executive will concurrently resign
                           his membership on the Board of Directors.

                  g.       No Mitigation. The Company agrees that, if
                           Executive's employment by the Company is terminated
                           during the term of this Agreement, Executive is not
                           required to seek other employment, or to attempt in
                           any way to reduce any amounts payable to Executive
                           by the Company pursuant to Section 7(d)(i) hereof.
                           Further, the amount of any payment provided for in
                           this Agreement shall not be reduced by any
                           compensation earned by Executive as the result of
                           employment by another employer, by retirement
                           benefits, or, except for amounts then due and
                           payable in accordance with the terms of any
                           promissory notes given by Executive in favor of the
                           Company, by offset against any amount claimed to be
                           owed by Executive to the Company or otherwise.

                  h.       Nature of Payments. The amounts due under this
                           Section 7 are in the nature of severance payments
                           considered to be reasonable by the Company and are
                           not in the nature of a penalty. Such amounts are in
                           full satisfaction of all claims Executive may have
                           in respect of his employment by the Company or its
                           affiliates and are provided as the sole and
                           exclusive benefits to be provided to Executive, his
                           estate, or his beneficiaries in respect of his
                           termination of employment from the Company or its
                           affiliates.



<PAGE>   21



         8.       Non-Competition; Non-Solicitation; Specific Enforcement.

                  a.       Non-Competition. Because Executive's services to the
                           Company are special and because Executive has access
                           to the Company's confidential information, Executive
                           covenants and agrees that, during the Employment
                           Period and, for a period of one year following the
                           Date of Termination by the Company for Cause or a
                           termination by Executive (other than a Constructive
                           Termination Without Cause) prior to a Change in
                           Control, Executive shall not, without the prior
                           written consent of the Board of Directors, become
                           associated with, or engage in any "Restricted
                           Activities" with respect to any "Competing
                           Enterprise," as such terms are hereinafter defined,
                           whether as an officer, employee, principal, partner,
                           agent, consultant, independent contractor or
                           shareholder. "Competing Enterprise," for purposes of
                           this Agreement, shall mean any person, corporation,
                           partnership, venture or other entity which (a) is a
                           publicly traded real estate investment trust, or (b)
                           is engaged in the business of managing, owning,
                           leasing or joint venturing residential real estate
                           within 30 miles of residential real estate owned or
                           under management by the Company or its affiliates.
                           "Restricted Activities," for purposes of this
                           Agreement, shall mean executive, managerial,
                           directorial, administrative, strategic, business
                           development or supervisory responsibilities and
                           activities relating to all aspects of residential
                           real estate ownership, management, residential real
                           estate franchising, and residential real estate
                           joint-venturing.

                  b.       Non-Solicitation. During the Employment Period, and
                           for a period of one year following the Date of
                           Termination, Executive shall not, without the prior
                           written consent of the Company, except in the course
                           of carrying out his duties hereunder, solicit or
                           attempt to solicit for employment with or on behalf
                           of any corporation, partnership, venture or other
                           business entity, any employee of the Company or any
                           of its affiliates or any person who was formerly
                           employed by the Company or any of its affiliates
                           within the preceding six months, unless such
                           person's employment was terminated by the Company or
                           any of such affiliates.

                  c.       Specific Enforcement. Executive and the Company
                           agree that the restrictions, prohibitions and other
                           provisions of this Section 8 are reasonable, fair
                           and equitable in scope, terms, and duration, are
                           necessary to protect the legitimate business
                           interests of the Company and are a material
                           inducement to the Company to enter into this
                           Agreement. Should a decision be made by a court of
                           competent jurisdiction that the character, duration
                           or geographical scope of the provisions of this
                           Section_8 is unreasonable, the parties intend and
                           agree that this Agreement shall be construed by the
                           court in such a manner as to impose all of those
                           restrictions on Executive's conduct that are
                           reasonable in light of the circumstances and as are
                           necessary to assure to the Company the benefits of
                           this Agreement. The Company and Executive further
                           agree that the services to be



<PAGE>   22


                           rendered under this Agreement by Executive are
                           special, unique and of extraordinary character, and
                           that in the event of the breach by Executive of the
                           terms and conditions of this Agreement or if
                           Executive, without the prior consent of the Board of
                           Directors, shall take any action in violation of
                           this Section 8, the Company will suffer irreparable
                           harm for which there is no adequate remedy at law.
                           Accordingly, Executive hereby consents to the entry
                           of a temporary restraining order or ex parte
                           injunction, in addition to any other remedies
                           available at law or in equity, to enforce the
                           provisions hereof. Any proceeding or action seeking
                           equitable relief for violation of this Section 8
                           must be commenced in the federal or state courts, in
                           either case in Virginia. Executive and the Company
                           irrevocably and unconditionally submit to the
                           jurisdiction of such courts and agree to take any
                           and all future action necessary to submit to the
                           jurisdiction of such courts.

         9.       Notice. Any notice required or permitted hereunder shall be
                  in writing and shall be deemed sufficient when given by hand
                  or by nationally recognized overnight courier or by Express,
                  registered or certified mail, postage prepaid, return receipt
                  requested, and addressed, if to the Company at 5904 Richmond
                  Avenue, Alexandria, VA 22303, and if to Executive at the
                  address set forth in the Company's records (or to such other
                  address as may be provided by notice).

         10.      Miscellaneous. This Agreement, together with Annex A and
                  Annex B and the Split Dollar Insurance Agreement, constitutes
                  the entire agreement between the parties concerning the
                  subjects hereof and supersedes any and all prior agreements
                  or understandings, including, without limitation, any plan or
                  agreement providing benefits in the nature of severance, but
                  excluding benefits provided under other Company plans or
                  agreements, except to the extent this Agreement provides
                  greater rights than are provided under such other plans or
                  agreements. As of the Effective Date, this Agreement
                  supersedes the Prior Agreement which will have no further
                  force or effect. Executive hereby waives, to the extent
                  applicable, the effect of the transactions contemplated by
                  the Merger Agreement (or shareholder approval of such
                  transaction) on any change in control provisions in any
                  Avalon employee benefit plan or agreement. This Agreement
                  shall terminate upon termination of the Merger Agreement and
                  abandonment of the merger contemplated by the Merger
                  Agreement. This Agreement may not be assigned by Executive
                  without the prior written consent of the Company, and may be
                  assigned by the Company and shall be binding upon, and inure
                  to the benefit of, the Company's successors and assigns. The
                  Company will require any successor (whether direct or
                  indirect, by purchase, merger, consolidation or otherwise) to
                  all or substantially all of the business and/or assets of the
                  Company to assume expressly and agree to perform this
                  Agreement in the same manner and to the same extent that the
                  Company would be required to perform it if no such succession
                  had taken place. As used in this Agreement, "Company" shall
                  mean the Company as hereinbefore defined and any successor to
                  its



<PAGE>   23
                  business and/or assets as aforesaid which assumes and agrees
                  to perform this Agreement by operation of law, or otherwise.
                  Headings herein are for convenience of reference only and
                  shall not define, limit or interpret the contents hereof.

         11.      Amendment. This Agreement may be amended, modified or
                  supplemented by the mutual consent of the parties in writing,
                  but no oral amendment, modification or supplement shall be
                  effective. No waiver by either party of any breach by the
                  other party of any condition or provision contained in this
                  Agreement to be performed by such other party shall be deemed
                  a waiver of a similar or dissimilar condition or provision at
                  the same or any prior or subsequent time. Any waiver must be
                  in writing and signed by Executive or an authorized officer
                  of the Company, as the case may be.

         12.      Severability. The provisions of this Agreement are severable.
                  The invalidity of any provision shall not affect the validity
                  of any other provision, and each provision of this Agreement
                  shall be valid and enforceable to the fullest extent
                  permitted by law.

         13.      Resolution of Disputes.

                  a.       Procedures and Scope of Arbitration. Except for any
                           controversy or claim seeking equitable relief
                           pursuant to Section 8 of this Agreement, all
                           controversies and claims arising under or in
                           connection with this Agreement or relating to the
                           interpretation, breach or enforcement thereof and
                           all other disputes between the parties, shall be
                           resolved by expedited, binding arbitration, to be
                           held in Virginia in accordance with the National
                           Rules of the American Arbitration Association
                           governing employment disputes (the "National
                           Rules"). In any proceeding relating to the amount
                           owed to Executive in connection with his termination
                           of employment, it is the contemplation of the
                           parties that the only remedy that the arbitrator may
                           award in such a proceeding is an amount equal to the
                           termination payments, if any, required to be
                           provided under the applicable provisions of Section
                           7(c) and, if applicable, Section 7(d) hereof, to the
                           extent not previously paid, plus the costs of
                           arbitration and Executive's reasonable attorneys
                           fees and expenses as provided below. Any award made
                           by such arbitrator shall be final, binding and
                           conclusive on the parties for all purposes, and
                           judgment upon the award rendered by the arbitrator
                           may be entered in any court having jurisdiction
                           thereof.

                  b.       Attorneys Fees.

                           (1)      Reimbursement After Executive Prevails.
                                    Except as otherwise provided in this
                                    paragraph, each party shall pay the cost of
                                    his or its own legal fees and expenses
                                    incurred in connection with an arbitration
                                    proceeding. Provided an award is made in
                                    favor of


<PAGE>   24

                                    Executive in such proceeding, all of his
                                    reasonable attorneys fees and expenses
                                    incurred in pursuing or defending such
                                    proceeding shall be promptly reimbursed to
                                    Executive by the Company within five days
                                    of the entry of the award.

                           (2)      Reimbursement in Actions to Stay, Enjoin or
                                    Collect. In any case where the Company or
                                    any other person seeks to stay or enjoin
                                    the commencement or continuation of an
                                    arbitration proceeding, whether before or
                                    after an award has been made, or where
                                    Executive seeks recovery of amounts due
                                    after an award has been made, or where the
                                    Company brings any proceeding challenging
                                    or contesting the award, all of Executive's
                                    reasonable attorneys fees and expenses
                                    incurred in connection therewith shall be
                                    promptly reimbursed by the Company to
                                    Executive, within five days of presentation
                                    of an itemized request for reimbursement,
                                    regardless of whether Executive prevails,
                                    regardless of the forum in which such
                                    proceeding is brought, and regardless of
                                    whether a Change in Control has occurred.

                           (3)      Reimbursement After a Change in Control.
                                    Without limitation on the foregoing, solely
                                    in a proceeding commenced by the Company or
                                    by Executive after a Change in Control has
                                    occurred, the Company shall advance to
                                    Executive, within five days of presentation
                                    of an itemized request for reimbursement,
                                    all of Executive's legal fees and expenses
                                    incurred in connection therewith,
                                    regardless of the forum in which such
                                    proceeding was commenced, subject to
                                    delivery of an undertaking by Executive to
                                    reimburse the Company for such advance if
                                    he does not prevail in such proceeding
                                    (unless such fees are to be reimbursed
                                    regardless of whether Executive prevails as
                                    provided in clause (ii) above).

14.      Survivorship. The provisions of Sections 4(b), 6, 8 and 13 of this
         Agreement shall survive Executive's termination of employment. Other
         provisions of this Agreement shall survive any termination of
         Executive's employment to the extent necessary to the intended
         preservation of each party's respective rights and obligations.

15.      Board Action. Where an action called for under this Agreement is
         required to be taken by the Board of Directors, such action shall be
         taken by the vote of not less than a majority of the members then in
         office and authorized to vote on the matter.

16.      Withholding. All amounts required to be paid by the Company shall be
         subject to reduction in order to comply with applicable federal, state
         and local tax withholding



<PAGE>   25



         requirements.

17.      Counterparts. This Agreement may be executed in two or more
         counterparts, each of which shall be deemed to be an original but all
         of which together shall constitute one and the same instrument. The
         execution of this Agreement may be by actual or facsimile signature.

18.      Governing Law. This Agreement shall be construed and regulated in all
         respects under the laws of the State of Maryland.



<PAGE>   26

         IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.

                                    Bay Apartment Communities, Inc.




                                    By: /S/ GILBERT M. MEYER



                                    Its: Chairman of the Board



                                    /S/ THOMAS J. SARGEANT
                                    Thomas J. Sargeant