MASTER SUBLEASE AGREEMENT

2.    Sublease Subordinate to Master Lease. Subject to Section 28 below, this Sublease is subject and subordinate to the Master Lease. As and to the extent hereinafter provided, all applicable terms and conditions of the Master Lease are incorporated into and made a part of this Sublease as if Sublessee were the lessee under the Master Lease. Unless expressly provided for in this Sublease to the contrary, Sublessee assumes and agrees to perform the Sublessor’s obligations under the Master Lease during the term of this Sublease with respect to the Premises, except that the obligation to pay rent to Lessor under the Master Lease shall be considered performed by Sublessee by virtue of its payments and reimbursements to Sublessor pursuant to this Sublease. Sublessee shall not cause or suffer any act of negligence that will violate any of the provisions of the Master Lease. Subject to the provisions of the NDA, if the Master Lease terminates for any reason, this Sublease shall terminate and the parties shall be relieved from all liabilities and obligations under this Sublease.

3.    Term. .

3.1    Term. This Sublease shall commence on the June 18, 2016 and shall end on August 31, 2027 (the “Term”).

3.2    Sublease Year. The first “Sublease Year” for the Jeffersonville Facility shall mean the period commencing on July 1, 2016 and ending on June 30, 2017. The first “Sublease Year” for the Savannah Beach and Oceanside Facilities shall be the first day of the calendar month subsequent to the month in which the Commencement Date, as defined below, for that Facility occurs, and ending 12 months later. Each subsequent Sublease year shall commence on the anniversary date of the first Sublease Year and end 12 months later.

3.3    Commencement Date. The commencement date of the Term for the Jeffersonville Facility shall be the Execution Date of this Lease. The commencement

date for the Savannah Beach Facility and Oceanside Facilities shall be the date and specific time that Sublessor accepts possession of such Facilities from the Prior Operator (such dates for all three Facilities shall be referred to herein as the “Commencement Date” of each Facility).

3.4    Termination Date. “Termination Date” shall mean the last day of the Term as defined in Paragraph 3.1 above, or the earlier date on which this Sublease may be terminated as provided herein.

3.5    Termination as to the Jeffersonville and Oceanside Facilities Only. If the Sublease is terminated as to the Jeffersonville and/or Oceanside Facilities as set forth in Section 9.3 below, the Sublease shall otherwise remain in full force and effect, and the Termination Date shall not have occurred, with respect to the remaining Facilities.

4.    Rent. During the Term, Sublessee shall pay in advance to Sublessor on or before the 1^st day of each calendar month the following rent (“Rent”):

4.1    Rent/Sublease Year One. During Sublease Year one, Rent shall be as follows:

(a)    The Savannah Beach Facility - - $21,000.00 per calendar month, with a proration of the first partial calendar month’s rent, so that the payment schedule shall be as follows:

i.
    No rent shall be due on the Commencement Date;

ii.    On the first day of the next calendar month, the Sublessee shall pay in arrears the prorated amount due for the first partial month and shall pay in advance the Rent for the then calendar month, i.e., $21,000.

iv.    On the first day of each succeeding month, the Sublessee shall pay $21,000.00 in monthly rent in advance, subject to the increases provided herein.

(b)    Jeffersonville and Oceanside Facilities - -

(i)     $1.00 per month beginning on the next calendar month after decertification;

(ii)    $10,500.00 per month, to begin on the first day of the third calendar month following Savannah Beach’s recertification such that it is eligible for Medicare and Medicaid reimbursement, or April 1, 2017, whichever date shall first occur; and

(iii) $21,000.00 per month to begin on the month following the fifth month for which the amount of $10,500.00 per month is due under the subparagraph just above.

4.2    Absolute Net Sublease. All Rent payments shall be absolutely net to Sublessor, free of any and all Taxes (as defined below in Section 7), Other Charges (as defined below in Section 7), and operating or other expenses of any kind whatsoever, all of which shall be paid by Sublessee, except as otherwise provided in this Sublease. Sublessee shall at all times during the Term remain obligated under this Sublease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind.

4.3    Payment Terms. All Rent and other payments to Sublessor hereunder shall be paid by wire transfer in accordance with Sublessor’s wire transfer instructions to be provided by Sublessor from time to time.

1.    Taxes and Other Charges. Sublessor shall promptly forward to Sublessee copies of all bills and payment receipts for Taxes or Other Charges received by it. Throughout the Term, Sublessee shall pay and discharge (including the filing of all required returns), prior to delinquency or imposition of any fine, penalty, interest or other cost (“Penalty”), (a) “Taxes”, consisting of any real property and other taxes and assessments levied or assessed with respect to the Premises (excluding income taxes, franchise taxes, estate taxes, transfer taxes and/or gross receipts taxes that may be imposed upon Sublessor), and (b) “Other Charges”, consisting of any utilities and other costs and expenses of the Facilities or any portion of the Premises and all other

charges, obligations or deposits assessed against any portion of the Premises during the Term. Sublessee shall pay the foregoing prior to delinquency and before any Penalty, but may pay the foregoing in permitted installments (whether or not interest accrues on the unpaid balance). Within ten (10) days of its receipt of Sublessor’s written notice of payment, Sublessee shall pay Sublessor an amount equal to any Taxes or Penalty that Sublessor at any time is assessed or otherwise becomes responsible and for which Sublessee is liable under this Sublease. However, nothing in this Sublease shall obligate Sublessee to pay penalties incurred as a result of Sublessor’s failure to timely forward bills to Sublessee.

1.1    Protests. Sublessee has the right, but not the obligation, in good faith to protest or contest (a “Protest”) in whole or in part (a) the amount or payment of any Taxes or Other Charges, and (b) the existence, amount or validity of any Lien (as defined in Section 10), by appropriate proceedings sufficient to (i) prevent the collection or other realization of such Taxes, Other Charges or Liens, or (ii) prevent the sale, forfeiture or loss of any portion of the Premises, or (iii) prevent the forfeiture of Rent to satisfy such Taxes, Other Charges or Liens. If Sublessee commences a Protest, Sublessee shall diligently prosecute any such Protest at its sole cost and expense and pay such Taxes, Other Charges or Lien. Sublessor shall cooperate in any Protest that involves an amount assessed against the Premises.

1.2    Impound. During the Term, Sublessee shall pay with each Base Rent payment a deposit of one-twelfth (1/12^th) of the amount required to discharge the annual amount of real property Taxes encumbering any portion of the Premises as and when they become due (“Impound Payments”). The deposits shall not bear interest nor be held by Sublessor in trust or as an agent of Sublessee, but rather shall be applied to the payment of the related obligations. If at any time within thirty (30) days prior to the due date the deposits shall be insufficient for the payment of the obligation in full, Sublessee shall within ten (10) days after demand deposit the deficiency with Sublessor. If deposits are in excess of the actual obligation, the required monthly deposits for the ensuing Sublease Year shall be reduced proportionately and any such excess as of the Termination Date shall be refunded to Sublessee. Sublessee shall forward to Sublessor or its designee all Tax bills, bond and assessment statements promptly upon receipt. If Sublessor transfers this Sublease, it shall transfer all such deposits to the transferee, and Sublessor shall thereafter have no liability of any kind with respect thereto.

2.    Insurance. Sublessee shall provide and maintain at its expense during the Term, all insurance required under the Master Lease. Such insurance shall (i) be maintained under valid and enforceable policies issued by insurers licensed and approved to do business in the state of Georgia, (ii) name Sublessor as an additional insured, (iii) be on an “occurrence” basis, or if claims made, include a provision whereby tail coverage costs are specified upon policy inception, (iv) cover all of Sublessee’s operations at the Facilities, (v) provide that the policy may not be canceled except upon not less than thirty (30) days’ prior written notice to Sublessor and (vi) be primary and provide that any insurance with respect to any portion of the Premises maintained by Landlord is excess and noncontributing with Sublessee’s insurance. The property policy(ies) shall also name the Sublessor, Landlord and Landlord’s lenders as loss payees; provided, however, that (a) all proceeds from any property insurance shall be made available to Sublessee to make repairs or replacements to the Facilities, and (b) all insurance proceeds related to equipment break-down shall be paid directly to Sublessee so that Sublessee

can use such proceeds to repair the applicable equipment. Sublessee hereby waives as to Sublessor all rights of subrogation which its insurance carriers may have by reason of any provision in any policy issued to it, provided such waiver does not thereby invalidate such policy. Insurer certificates evidencing the existence of the insurance required by this Sublease and showing the interest of Sublessor, Landlord and Landlord’s lenders shall be provided to Sublessor prior to the Commencement Date or, for a renewal policy, not less than ten (10) days prior to the expiration date of the insurance policy being renewed. If Sublessor is provided with a certificate, it may demand that Sublessee provide a complete copy of the related policy within thirty (30) days. Notwithstanding any provision in the Master Lease to the contrary, Sublessee shall provide, at is expense, “all risk” property insurance coverage for the full replacement value of the Facilities which replacement value amounts shall be provided by Sublessor to Sublessee from time to time. The deductible for such coverage shall not be greater than Twenty-five Thousand Dollars ($25,000.00). Sublessee shall also provide business interruption insurance for loss of rental value for a period of not less than twelve (12) months and providing that any covered loss under such policy shall be payable to Sublessor.

1.    Sublessee Personal Property. Sublessee may bring his own articles of personal property to the Premises for use and Sublessee shall have the right to remove any such personal property from the Premises provided that Sublessee, at its expense, shall repair any damages to the Premises caused by such removal or by the original installation thereof.

2.    Financial, Management and Regulatory Reports. In addition to any reports required under the Master Lease, Sublessee shall provide Sublessor with the reports listed in Exhibit “D” at the time described therein, and such other information about it or the operations of the Facilities as Sublessor may reasonably request from time to time, including such information requested in connection with any financing of the Premises sought by Sublessor. All financial information provided by Sublessee shall be prepared in accordance with generally accepted accounting principles consistently applied and shall be submitted electronically in the form of unrestricted, unlocked “.xlsx” spreadsheets created using Microsoft Excel (2003 or newer editions). Similarly, should Sublessor or its parent, AdCare Health Systems, Inc., be subject to any particular reporting requirements of the Securities Exchange Commission during the Term for which it needs reports, documentation or other information from Sublessee, Sublessee agrees to deliver such reports, documentation and information within ten (10) days after Sublessor’s request for the same. Sublessor shall comply with all requirements of applicable law with respect to any such information provided by Sublessee, including, without limitation, the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations as amended by the Health Information Technology for Economic and Clinical Health Act (“HIPAA”). Sublessee shall provide copies of all reports required under the Master Lease to Sublessor and to Lessor.

(a)    Sublessee’s failure to pay within five (5) days of when due any Rent, Taxes, Other Charges, Impound Payments or other required payments;

(b)    Sublessee's default under the Note, Security Agreement or the Deposit Control Agreement;

(c)    (i) The revocation, suspension or termination of any material license held by Sublessee required for the operation of the Facilities or the certification of the Facilities for provider status under Medicare or Medicaid, if applicable (ii) the closure of the Facilities (except with respect to the time required to make any required repairs or to make any Alterations); (iii) the sale or transfer by Sublessee of all or any portion of any certificate of need, bed rights or other similar certificate or license relating to the Facilities; or (iv) the use of any portion of the Facilities other than for skilled nursing facilities and for ancillary services relating thereto;

(d)    Sublessee’s failure to perform or comply with the provisions of the Master Lease after expiration of the applicable cure period, if any;

(e)    (i) Sublessee shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make an assignment of all or substantially all of its property for the benefit of creditors; or (ii) a receiver, trustee or liquidator shall be appointed for Sublessee or its property, if not discharged within sixty (60) days after the date of such appointment; (iii) the filing by Sublessee of a voluntary petition under any federal bankruptcy or state law to be adjudicated as bankrupt or for any arrangement or other debtor’s relief; or (iv) the involuntary filing of such a petition against Sublessee by any other party, unless dismissal is diligently prosecuted and such petition is dismissed within sixty (60) days after filing;

(f)    Sublessee’s failure to perform or comply with any provision of this Sublease not requiring the payment of money unless remedied within ten (10) days after such notice from Sublessor or if such default cannot with due diligence be so cured because of the nature of the default or delays beyond the control of Sublessee and such additional time does not jeopardize Sublessee's authority to operate Facilities, then such default shall not constitute an Event of Default if Sublessee uses its commercially reasonable efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof;

(g)    The receipt by Sublessee of a citation from the Georgia Department of Community Health (“DCH”) or from CMS indicating any Facility is not in substantial compliance with CMS' requirements of participation for any Facility which Sublessee does not promptly and fully address and remedy to Sublessor’s reasonable satisfaction; or

(h)    Except as provided in Section 9.4 above, Sublessee’s failure to pay when due any outstanding provider tax (“Bed Tax”) payments that it is required to make with respect to its operations of the Facilities unless such Bed Tax is immediately paid, along with any penalties or late fees, once the deficiency is brought to Sublessee's attention.

5.    Remedies. Upon the occurrence of an Event of Default, Sublessor may exercise all rights and remedies under this Sublease and the laws of the State of Georgia that are available to a Sublessor of real and personal property in the event of a default by its Sublessee, and as to the Sublessee Property, all remedies granted under the laws of such state to a secured party under its Uniform Commercial Code. Sublessor shall use commercially reasonable efforts to mitigate damages, however, Sublessor shall not be responsible or liable for any failure to relet the Premises or to collect any rent due upon any such reletting notwithstanding such commercially reasonable efforts. Upon the occurrence of an Event of Default, Sublessee shall pay Sublessor, promptly upon demand, all reasonable expenses incurred by it in obtaining possession and reletting any of the Premises, including reasonable fees, commissions and costs of attorneys, architects, agents and brokers.

5.1    General. Without limiting the foregoing, Sublessor shall have the right (but not the obligation) to do any of the following upon an Event of Default: (a) sue for the specific performance of any covenant of Sublessee as to which it is in breach; (b) enter upon any portion of the Premises, terminate this Sublease, dispossess Sublessee from the Premises through appropriate legal procedures and/or collect money damages by reason of Sublessee’s breach, including pursue its rights with respect to all obligations and liabilities of Sublessee under this Sublease which survive the termination of the Term; (c) elect to leave this Sublease in place and sue for Rent and other money damages as the same come due; (d) (before or after repossession of the Premises pursuant to clause (b) above and whether or not this Sublease has been terminated) relet any portion of the Premises to such Sublessee(s), for such term(s) (which may be greater or less than the remaining balance of the Term), rent, conditions (which may include concessions or free rent) and uses as it may determine in its sole discretion and collect and receive any rents payable by reason of such reletting, (e) pursue the remedies set forth in Section 15.2 below.

5.2    Transition of Operations to Sublessor. Commencing on the date of the Event of Default, Sublessor or its designee, upon written notice to Sublessee, may elect to assume operation of the Facilities and Sublessee agrees to use its best efforts to fully accomplish the transfer of such management and operation without interrupting the operation of the Facilities. Sublessee shall immediately take all actions to effect a change of ownership ("CHOW") on an expedited basis if possible including but not limited to assigning its license and its Medicare and Medicaid provider numbers and agreements to Sublessor or its designee to enable Sublessor or its designee to operate the Facilities to the extent allowed by law. Sublessee shall further use its best efforts to avoid jeopardizing any then existing licensure or certification of the Facilities, and Sublessee shall, at no cost to Sublessee, comply with all requests for an orderly CHOW and transfer of any and all licenses, Medicare and Medicaid certifications and possession of the Premises. Sublessee agrees to execute and deliver a usual and customary operations transfer agreement (“OTA”) in favor of Sublessor or its designee and any other

documents required in connection with the change of operators at the Facilities. If Sublessee fails to execute an OTA, the CHOW documents or assign its provider agreements and certifications, an officer of Sublessor may act as Sublessee's authorized representative to execute such documents on behalf of Sublessee to the extent allowed by applicable law.

5.3    Remedies Cumulative; No Waiver. No right or remedy herein conferred upon or reserved to Sublessor or Sublessee is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. Any notice or cure period provided herein shall run concurrently with any provided by applicable law. No failure of Sublessor or Sublessee to insist at any time upon the strict performance of any provision of this Sublease or to exercise any option, right, power or remedy contained herein shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Sublessee or Sublessor, as applicable. Sublessor’s receipt of and Sublessee’s payment of any Rent or other sum due hereunder (including any late charge) with knowledge of any breach shall not be deemed a waiver of such breach, and no waiver by Sublessor of any provision of this Sublease shall be effective unless expressed in a writing signed by it.

5.4    Performance of Sublessee’s Obligations. If Sublessee at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Sublease and not remedy the same within the applicable notice and/or cure period, then Sublessor may, without waiving or releasing Sublessee from any obligations or default hereunder, make such payment or perform such act for the account and at the expense of Sublessee, and enter upon any portion of the Premises for the purpose of taking all such action as may be reasonably necessary. No such entry shall be deemed an eviction of Sublessee. All sums so paid by Sublessor and all necessary and reasonable incidental costs and expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the performance of any such act by it from the date of the making of such payment or the incurring of such costs and expenses, shall be payable by Sublessee to Sublessor upon Sublessor’s written demand therefor.

5.5    Equitable Relief. If Sublessee breaches any portion of this Section 15, Sublessee agrees that: (i) Sublessor would suffer irreparable harm; (ii) it would be difficult to determine damages, and money damages alone would be an inadequate remedy for the injuries suffered by Sublessor; and (iii) if Sublessor seeks injunctive relief to enforce this Section 15, Sublessee shall waive and shall not (a) assert any defense that Sublessor has an adequate remedy at law with respect to the breach or (b) require Sublessor to post a bond or any other security. Nothing contained in this Agreement shall limit Sublessor’s right to any other remedies at law or in equity.

6.1    Surrender of Possession. On the Termination Date, Sublessee shall deliver to Sublessor or its designee possession of (a) the Facilities in a neat and clean condition and in as good a condition as existed at the date of Sublessee’s possession and occupancy pursuant to this Sublease, ordinary wear and tear casualty and acts of God excepted, (b) a fully

operational, licensed and certified (if applicable) business at the Facilities including, at Sublessee’s sole cost, any alterations required to be made prior to the termination of this Sublease, including any alterations required in connection with a change of ownership inspection survey for the transfer of operation of any portion of the Premises to Sublessor or its designee, and (c) all patient charts and resident records along with appropriate resident consents if necessary and copies of all of its books and records relating to the Facilities and the Premises. Accordingly, Sublessee shall not at any time during or after the Term seek to transfer, surrender, allow to lapse, or grant any security interest or any other interest in and to the licenses, permits or certifications relating to the Facilities or the Premises, nor shall Sublessee commit or omit any act that would jeopardize the Facilities or any licensure or certification of the Facilities. Sublessee shall, at no cost to Sublessee, cooperate fully with Sublessor or its designee in transferring or obtaining all necessary licenses and certifications for Sublessor or its designee, and Sublessee shall comply with all reasonable requests for an orderly transfer of the Facilities licenses, and Medicare and Medicaid certifications and possession at the time of its surrender of the Premises to Sublessor or its designee to operate the Facilities. Subject to all applicable laws, Sublessee hereby assigns, to the extent assignable, effective upon the Termination Date, all rights to operate the Facilities to Sublessor or its designee, including all required licenses and permits and all rights to apply for or otherwise obtain them relating to any portion of the Premises.

6.2    Holding Over. If Sublessee shall for any reason remain in possession of the Premises after the Termination Date without Sublessor’s consent, such possession shall be a month-to-month tenancy during which time Sublessee shall pay as rental on the first (1^st) business day of each month one hundred twenty-five percent (125%) of the monthly Rent payable with respect to the last Sublease Year, plus all additional charges accruing during the month and all other sums, if any, payable by Sublessee pursuant to this Sublease. Nothing contained herein shall constitute the consent, express or implied, of Sublessor to the holding over of Sublessee after the Termination Date, nor shall anything contained herein be deemed to limit Sublessor’s remedies. In the event that as of the Termination Date Sublessor does not have a replacement operator to operate all of the Facilities effective as of the Termination Date, and Sublessee continues to operate the Facilities after the Termination Date until a replacement operator is permitted under applicable law to operate the Facilities, the Rent for such period of time after the Termination Date shall equal fifty percent (50%) of the monthly Rent payable with respect to the last Sublease Year.

7.1    Entry and Examination of Records. Sublessor and its representatives may enter any portion of the Premises with a representative designated by Sublessee at any reasonable time after at least forty-eight (48) hours’ written notice to Sublessee to inspect the Premises for compliance or for any other reason; provided that no such notice shall be required in the event of an emergency, upon an Event of Default or to post notices of non-responsibility under any mechanics’ or materialmans’ lien law. No such entry shall unreasonably interfere with residents, patients, patient care or the Sublessee’s operations of the Facilities, and Sublessor shall

not contact or communicate with any of Sublessee’s employees at any time when Sublessor or its representatives are at the Premises. Sublessor and its representatives shall abide by all rules and regulations governing nursing facilities during any time when they are at the Premises. During normal business hours, Sublessee will permit Sublessor and its representatives, inspectors and consultants to examine all contracts, books and financial and other records at Sublessee’s offices relating to Sublessee’s operations of the Facilities.

7.2    Grant Liens. This Sublease shall be subordinate to the right, title, and interest of any lender or other party holding a security interest in or a lien upon the Premises under any and all mortgage instruments or deeds to secure debt presently encumbering the Premises or the Facilities and to any and all other deeds to secure debt or mortgage instruments hereafter encumbering the Premises or the Facilities. Sublessee shall at any time hereafter, on demand of Landlord, Sublessor or the holder of any such deed to secure debt or mortgage instrument, execute any instruments which may reasonably be required by such party for the purpose of evidencing the subordination of this Sublease to the lien or security of such party. Sublessee shall, upon demand, at any time or times, execute, acknowledge, and deliver to Landlord, Sublessor or the holder of any such instruments or deeds to secure debt, without expense, any and all documents that may be reasonably necessary to make this Sublease superior to the lien of any of the same. If the holder of any of said instruments or deeds to secure debt shall hereafter succeed to the rights of Sublessor under this Sublease, Sublessee shall, at the option of such holder or a purchaser at any foreclosure or sale under power, attorn to and recognize such successor as Sublessor under this Sublease. Sublessee shall promptly execute, acknowledge, and deliver any instrument that may be reasonably necessary to evidence such attornment.

7.3    Estoppel Certificates. Sublessor and Sublessee shall, at any time upon not less than ten (10) business days’ prior written request by the other party, have an authorized representative execute, acknowledge and deliver to Landlord, Sublessor or Sublessee, as the case may be, or their designee a written statement certifying (a) that this Sublease, together with any specified modifications, is in full force and effect, (b) the dates to which Rent and additional charges have been paid, (c) to the party’s knowledge, that no default by either party exists or specifying any such default, and (d) as to such other matters as Landlord, Sublessor or Sublessee, as the case may be, may reasonably request.

7.4    Conveyance Release. If Landlord or any successor owner shall sell or transfer any portion of the Premises, they shall thereafter be released from all future liabilities and obligations hereunder first arising or accruing from and after the date of such conveyance or other transfer, which instead shall thereupon be binding upon the new owner.

8.    Assignment and Subletting.

8.1    Except as otherwise expressly permitted in this Sublease, without Sublessor’s prior written consent, Sublessee shall not assign this Sublease, or sublease all or any part of the Premises, or permit the use of the Premises by any party other than Sublessee. This prohibition includes an assignment or subletting to or by a receiver or trustee in any federal or state bankruptcy, insolvency, or other proceeding. For purposes of this Section, a sale or transfer

of all or a controlling ownership interest in Sublessee or a merger or other combination by Sublessee or a sale of all or substantially all of Sublessee’s assets in lieu thereof shall be deemed an assignment or other transfer of this Sublease.

9.1    Damage by Fire or Other Casualty. Sublessee shall promptly notify Sublessor of any damage or destruction of any portion of the Premises and diligently repair or reconstruct such portion of the Premises to a like or better condition than existed prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be paid directly to Sublessor and, if an Event of Default has not occurred hereunder, shall be used for the repair or reconstruction of the applicable portion of the Premises. If such proceeds are insufficient, Sublessee shall provide the required additional funds; provided, however, that if the damage or destruction occurs during the final year of the Sublease through no fault of Sublessee, Sublessee may elect to terminate the Sublease on thirty (30) days notice provided it remits all insurance proceeds and rental value insurance to Sublessor. Sublessee shall contribute an amount equal to the applicable deductible under the property insurance coverage. Sublessee shall not have any right under this Sublease, and hereby waives all rights under applicable law, to abate, reduce or offset Rent by reason of any damage or destruction of any portion of the Premises by reason of an insured or uninsured casualty.

10.    Condemnation. Except as provided to the contrary in this Section 18, this Sublease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof, and the Base Rent and Additional Rent payable under this Sublease thereafter shall be equitably adjusted. If during the Term all or substantially all (a “Complete Taking”) or a smaller portion (a “Partial Taking”) of any Facility is taken or condemned by any competent public or quasi-public authority, then (a) in the case of a Complete Taking, Sublessee may at its election made within thirty (30) days of the effective date of such Taking, terminate this Sublease as to the applicable Facility and the current Rent and Additional Rent payable under this Sublease thereafter shall be equitably adjusted as of the effective date of such termination, or (b) in the case of a Partial Taking, the Rent shall be abated to the same extent as the resulting diminution in Fair Market Value of the applicable portion of the Premises. The resulting diminution in Fair Market Value on the effective date of a Partial Taking shall be as established pursuant to Exhibit “E”. Sublessor alone shall be entitled to receive and retain any award for a taking or condemnation other than a temporary taking; provided, however, Sublessee shall be entitled to submit its own claim in the event of any such taking or condemnation with respect to the value of Sublessee’s Subleasehold interest in any portion of the Premises and/or the relocation costs incurred by Sublessee as a result thereof. In the event of a temporary taking of less than all or substantially all of any Facility, Sublessee shall be entitled to receive and retain any and all awards for the temporary taking and the Rent due under this Sublease shall be not be abated during the period of such temporary taking.

11.    Indemnification. Sublessee agrees to protect, indemnify, defend and save harmless Sublessor, its members, managers, Affiliates, directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense, loss, cost, deficiency, fine, penalty or damage (including consequential or punitive damages) of any

kind or nature, including reasonable attorneys’ fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Sublease, the Premises or the operations of Sublessee on any portion of the Premises, including, without limitation, (a) the breach by Sublessee or any of its representations, warranties, covenants or other obligations hereunder, (b) any Protest, (c) all known and unknown Environmental Activities on any portion of the Premises, Hazardous Materials Claims or violations by Sublessee of a Hazardous Materials Law with respect to any portion of the Premises, and (d) upon or following the Termination Date, the correction of all deficiencies of a physical nature identified by, and any liability assessed or asserted by, any governmental agency or Medicare or Medicaid as a result of or arising out of or in connection with Sublessee’s use, occupancy and operations of the Facilities during the Term (including any refunds or overpayments to Medicare, Medicaid or any other third party payor). Upon receiving knowledge of any suit, claim or demand asserted by a third party that Sublessor believes is covered by this indemnity, it shall give Sublessee notice of this matter. Sublessee shall then defend Sublessor at Sublessee’s expense (including Sublessor’s reasonable attorneys’ fees and costs) with legal counsel satisfactory to Sublessor. The foregoing indemnity shall exclude any liability, expense, loss, cost, deficiency, fine, penalty or damage (including consequential or punitive damages) of any kind or nature resulting due to acts or omissions of Sublessor, its members, managers, Affiliates, directors, officers, shareholders, agents and employees.

12.    Disputes. If any party brings any action to interpret or enforce this Sublease, or for damages for any alleged breach, the prevailing party shall be entitled to reasonable attorneys’ fees and costs as awarded by the court in addition to all other recovery, damages and costs, at all trial and appellate levels.

13.    Notices. All notices and demands, certificates, requests, consents, approvals and other similar instruments under this Sublease shall be in writing and sent by personal delivery, U. S. certified or registered mail (return receipt requested, postage prepaid) or FedEx or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows:

If to Sublessee:                If to Sublessor:

____________________            AdCare Health Systems, Inc.

____________________            1145 Hembree Rd.             

____________________             Roswell, Georgia 30076            Attention: ___________             Attention: CEO

                        

14.    Miscellaneous. This Sublease has been freely and fairly negotiated, and all provisions shall be interpreted according to their fair meaning and shall not be strictly construed against any party. While nothing contained in this Sublease should be deemed or construed to constitute an extension of credit by Sublessor to Sublessee, if a portion of any payment made to Sublessor is deemed to violate any applicable laws regarding usury, such portion shall be held by Sublessor to pay the future obligations of Sublessee as such obligations arise and if Sublessee discharges and performs all obligations hereunder, such funds will be reimbursed (without interest) to Sublessee on the Termination Date. If any part of this Sublease shall be determined to be invalid or unenforceable, the remainder shall nevertheless continue in full force and effect. Time is of the essence, and whenever action must be taken (including the giving of notice or the delivery of documents) hereunder during a certain period of time or by a particular date that ends or occurs on a Saturday, Sunday or federal holiday, then such period or date shall be extended until the immediately following business day. Whenever the words “including”, “include” or “includes” are used in this Sublease, they shall be interpreted in a non-exclusive manner as though the words “without limitation” immediately followed. Whenever the words day or days are used in this Sublease, they shall mean “calendar day” or “calendar days” unless expressly provided to the contrary. The titles and headings in this Sublease are for convenience of reference only and shall not in any way affect the meaning or construction of any provision. Unless otherwise expressly provided, references to any “Section” mean a section of this Sublease (including all subsections), to any “Exhibit” or “Schedule” mean an exhibit or schedule attached hereto or to “Medicare” or “Medicaid” include any successor program. If more than one Person is Sublessee hereunder, their liability and obligations hereunder shall be joint and several. Promptly upon the request of either party and at its expense, the parties shall prepare, enter into and record a suitable short form memorandum of this Sublease. This Sublease (a) contains the entire agreement of the parties as to the subject matter hereof and supersedes all prior or contemporaneous verbal or written agreements or understandings, (b) may be executed in several counterparts, (including electronically mailed copies in portable document format (PDF)), each of which shall be deemed an original, but all of which shall constitute one and the same document, (c) may only be amended by a writing executed by the parties, (d) shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties, (e) shall be governed by and construed and enforced in accordance with the internal laws of the State of South Carolina, (f) venue of any legal action arising under or pursuant to this Sublease shall be in the county where the premises are located, and (g) incorporates by this reference any Exhibits and Schedules attached hereto.

15.    Sublease of Entire Premises. Sublessee and Sublessor each acknowledge and agree that this Sublease constitutes a single, indivisible Sublease of the entire Premises which includes all three Facilities, and the Premises constitutes a single economic unit, except as

specifically set forth in this Sublease. The Rent, other amounts payable hereunder and all other provisions contained herein have been negotiated and agreed upon based on the intent to the Sublease the entirety of the three Facilities as a single and inseparable transaction as set forth in this Sublease, and such Rent, other amounts and other provisions would have been materially different had the parties intended to enter into separate subleases or a divisible sublease. Any Event of Default under this Sublease shall constitute an Event of Default as to the entire Premises.

(a)
    Agrees, acknowledges and is forever estopped from asserting to the contrary that the statements set forth in the first sentence of this Section are true, correct and complete;

(b)
    Agrees, acknowledges and is forever estopped from asserting to the contrary that this Sublease is a single Sublease pursuant to which the collective Premises are demised as a whole to Sublessee; and

(c)
    Agrees, acknowledges and is forever estopped from asserting to the contrary that if, notwithstanding the provisions of this Section, this Sublease were to be determined or found to be in any proceeding, action or arbitration under state or federal bankruptcy, insolvency, debtor-relief or other applicable laws to constitute multiple Subleases demising multiple properties, such multiple Subleases could not, by the debtor, trustee, or any other party, be /selectively or individually assumed, rejected or assigned.

SECURED LENDER:

ADCARE HEALTH SYSTEMS, INC.,

a Georgia corporation

Notice Address:

        

b. If the bed tax liability related to any Facility has not been paid and is not fully current;

c. If the capital repairs required to be performed by Sublessor pursuant to its Master Sublease with Sublessee have not been completed.

d. If Sublessee is in default under the Master Sublease.

Master Lessor was the landlord under the Sublease may waive any of these conditions at his sole discretion.

Master Lessor shall not be bound by any obligations of Sublessor set forth in the Master Sublease at Sections 9.3, 9.4, 9.5, or 10.2.

b. If the bed tax liability related to any Facility has not been paid and is not fully current;

c. If the capital repairs required to be performed by Sublessor pursuant to its Master Sublease with Sublessee have not been completed.

d. If Sublessee is in default under the Master Sublease.

Master Lessor was the landlord under the Sublease may waive any of these conditions at his sole discretion.

Master Lessor shall not be bound by any obligations of Sublessor set forth in the Master Sublease at Sections 9.3, 9.4, 9.5, or 10.2.

4.Successors. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors in interest, heirs and assigns and any subsequent owner of the Property.

1.1.
    DEBTORS' PLEDGE. As collateral security for all of the Obligations (as defined in Section 2 hereof), Debtors' hereby pledges and assigns to Secured Party and grants to Secured Party a continuing security interest in the following:

1.1.1.
    All cash, accounts receivable, assets, and properties, both tangible and intangible, owned or leased by the Debtors that are used in connection with the ownership, operation or development of the Debtors' business to the extent Debtors have an interest therein (Debtors acknowledges that pursuant to the terms of its sublease with Secured Party all FF&E and personal property at the Debtors' facilities belongs to Secured Party and Debtors have no ownership interest therein); and

1.1.2.
    All profits, income, property, and any and all other proceeds arising from or on account of the above-described property, whether now owned or hereafter acquired by the Debtors and howsoever its interest therein may arise or appear (whether by ownership, security interest claim or otherwise).

1.2.
    DEFINITION OF COLLATERAL. The assets and properties described in Sections 1.1 and 1.2, above, shall be referred to collectively as the “Collateral.”

2.1.
    The security interest created by this Agreement in the Collateral constitutes continuing collateral security for:

2.1.1.
    The payment of all principal of, interest on, late payments under, and prepayment penalties or premiums (if any) with respect to, the Note;

2.1.2.
    The performance and discharge of each and every obligation of Debtorscontained herein or in any other document executed in connection with the Note; and

2.1.3.
    Each and every amendment, renewal, increase or extension of any of the foregoing.

2.2.
    The security interests granted herein are granted as security only and shall not subject Secured Party to, or transfer or in any way affect or modify, any obligation or liability of Debtor or the Debtor with respect to any of the Collateral or any transaction in connection therewith.

3.1.
    Debtors and/or the Debtor are and will be at all times the legal and beneficial owner of the Collateral free and clear of any lien, security interest or other charge or encumbrance, except for the security interest created by this Agreement.

3.2.
    The exercise by Secured Party of its rights and remedies hereunder in accordance with and subject to the terms hereof will not contravene any law or governmental regulation currently existing or any contractual restriction in either case binding on or affecting Debtor or the Debtor, or any of their respective properties, and will not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of Debtor's or the Debtor’s other properties or the acceleration of any indebtedness.

3.3.
    No authorization or approval or other action by any governmental authority or regulatory body or any other person is required to be obtained by Debtor or the Debtor for the pledge hereunder by Debtor of, or the grants by Debtors of the security interest created in, the Collateral under this Agreement.

3.4.
    This Agreement creates a valid security interest in favor of Secured Party in the Collateral.

3.5.
    No financing statement covering the Collateral or any part thereof has been filed by Debtor with any filing officer, and no security agreement covering the Collateral or any part thereof has been made other than with Secured Party, and no security interest, other than the security interest granted to Secured Party, has attached or been perfected in the Collateral or in any part thereof.

4.1.
    Keep adequate records concerning the Collateral and permit Secured Party or any agents or representatives thereof at any reasonable time, upon reasonable prior notice, and from time to time to examine and make copies of and abstracts from such records;

4.2.
    At its expense, defend Secured Party's right, title and special property and security interest in and to the Collateral against the claims of any person;

4.3.
    At its expense, at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or that Secured Party may reasonably request in order to (a) perfect and protect the security interest created or purported to be created hereby, (b) enable Secured Party to exercise and enforce his rights and remedies hereunder in respect of the Collateral, (c) otherwise effect the purposes of this Agreement;

4.4.
    Not create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any Collateral;

4.5.
    At its expense and in such manner and form as Secured Party may require, execute, deliver, file and record any financing statement, specific assignment or other paper and take any other action that may be necessary or desirable, or that Secured Party may request, in order to create, preserve, perfect or validate any security interest granted herein or to enable Secured Party to exercise and enforce its rights in accordance with the terms hereof with respect to any of the Collateral. To the extent permitted by applicable law, Debtor hereby authorizes Secured Party to execute and file, in the name of Debtors or otherwise, Uniform Commercial Code (the “Code”) financing statements (which may be carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement relating to this Agreement) which Secured Party in its sole discretion may deem necessary or appropriate to further perfect the security interests created herein; and

4.6.
    Not take or fail to take any action which would in any manner impair the value or enforceability of Secured Party's security interest in any Collateral.

5.1.
    Debtors hereby authorize Secured Party to file, without the signature of Debtor or the Debtor

where permitted by law, one or more financing or continuation statements, and amendments thereto, relating to the Collateral.

5.2.
    Debtors hereby irrevocably appoint Secured Party as Debtors' attorney-in-fact and proxy, with full authority in the place and stead of Debtors, and in their names or otherwise, from time to time in Secured Party's discretion, to take any action and to execute any instrument which Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Agreement.

5.3.
    If Debtors fail to perform any agreement or obligation contained herein, Secured Party may perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be payable by Debtor and/or the Debtor pursuant to Section 7 hereof.

5.4.
    Secured Party shall have no duty or liability to preserve rights pertaining thereto and shall be relieved of all responsibility for the Collateral, and Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which Secured Party accords his own property.

6.1.
    AFFIRMATIVE COVENANTS. From and after the Effective Date of this Agreement and so long as any of the Obligations remain outstanding, Debtors will, unless Secured Party otherwise consents in writing:

6.1.1.
    Use its best efforts to preserve and grow the Debtor's business and its relationships with and the goodwill of the customers and others having business dealings with the Debtors;

6.1.2.
    Cause the Debtor to perform all of the Debtor’s obligations under contracts, leases and documents relating to or affecting its business or its assets, except such obligations as the Debtor in good faith reasonably disputes;

6.1.3.
    Cause the Debtor to pay the Debtor’s debts, obligations and trade payables only when and as they become due;

6.1.4.
    Permit Secured Party access to the Debtor’s books and records, including financial records, upon five (5) days advance written notice for the purpose of auditing Debtor’s performance of its obligations hereunder. In the event such an audit reveals that Debtor has materially breached any covenant or agreement hereunder, Debtor shall immediately reimburse Secured Party for the costs and expenses incurred by Secured Party in conducting such audit.

6.2.
    NEGATIVE COVENANTS. From and after the Effective Date of this Agreement, and for

so long as any Obligation remains outstanding, Debtors will not, without the prior written consent of Secured Party:

6.2.1.
    Approve any amendment to the Articles of Incorporation or the Bylaws of the Debtors;

6.2.2.
    Permit the Debtors to issue, reserve for issuance, grant, sell or authorize the issuance of any shares of capital stock or other securities or subscriptions, options, warrants, calls rights or commitments of any kind relating to the shares of capital stock of the Debtors or any of its affiliates, or grant any option, warrant or right to purchase any bonds, debentures, notes or other corporate securities;

6.2.3.
    Permit the Debtors to subdivide or in any way reclassify any of the shares of its capital stock;

6.2.4.
    Permit the Debtors to declare, set aside or pay any dividend or other distribution or payment in respect of the outstanding shares of its capital stock, or purchase, redeem or otherwise acquire any of the shares of the capital stock of the Debtors or any of its affiliates;

6.2.5.
    Permit the Debtors to take any action, the effect of which is to cause or permit the Debtor to merge, consolidate or reorganize with or sell substantially all of its assets to any other person or entity,

6.2.6.
    Permit the Debtors to introduce any new material method of management or operation, or make any change in the conduct or operation of the Debtor’s business, other than changes made in the lawful and ordinary course of business which, individually and in the aggregate, do not materially and adversely affect the Debtor or its business;

6.2.7.
    Permit the Debtors to pay to Karen Forrister or David Lemcke a salary or other remuneration of any sort other than the approved management fees set forth in Section 6.2.15 below.;

6.2.8.
    Permit the Debtor to incur any debt or subject any of its assets to any encumbrance, except in the ordinary course of business;

6.2.9.
    Permit the Debtor to sell, lease, dispose of, or waive any substantial rights relating to, any of the property or assets of the Debtor, whether tangible or intangible, other than sales occurring in the lawful and ordinary course of business;

6.2.10.
    Permit the Debtors to conduct any bargain or liquidation sale or otherwise offer or dispose of its inventory at lower prices or on more favorable terms and conditions than those that have historically been charged or utilized by the Debtor, but this provision shall not be construed to apply to normal promotional sales to the extent such sales are consistent with the Debtor's past practices;

6.2.11.
    Permit the Debtors to voluntarily incur any obligation or liability, whether absolute, accrued, contingent or otherwise, other than (a) obligations incurred in connection with the purchase of goods and services in the ordinary course of business consistent with past practices, and (b) other obligations incurred in the lawful and ordinary course of business which individually and in the aggregate do not have a material adverse effect on the Debtor’s financial condition;

6.2.12.
    Cause or allow the loss of any insurance coverage for the Debtor’s assets or its business, unless replaced with coverage that was substantially similar (in amount and insurer) to the coverage now in effect;

6.2.13.
    Permit the Debtors to sell or dispose of, or otherwise divest itself of the ownership, possession, custody or control, of any corporate books or records of the Debtor that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period;

6.2.14.
    Permit the Debtors to suffer any diminution in value whether in the form of damage to reputation, loss of prospective business or the termination of material contracts such that in Secured Party's reasonable judgment, the value of the Collateral has, or is likely to, materially decline..

6.2.15.
    Enter into a management or other agreement of any sort between Debtors and, directly or indirectly, Karen Forrister or David Lemcke or any entity or affiliate with which they have a pecuniary interest of any sort for management or other services to be provided to the Debtors or its affiliates, without the express written permission of Secured Party; provided, however, that Debtors may enter into a management agreement and pay such persons or entities a management fee of 2.5% of Debtors’ revenue from the Savannah Beach Facility and then a management fee of 2.5% on its revenue from both the Oceanside and Jeffersonville Facilities at such time that such Facilities have been recertified for Medicare reimbursement by CMS and Debtors are paying rent to Secured Party for them under the master sublease between Debtors and Secured Party.

6.3.
    REPORTS. In furtherance of the covenants contained in this Section 6, the Debtor shall furnish Secured Party, within fifteen (15) days of the end of each month and twenty (20) days of the end of each quarter of year end, with a profit and loss statement of the Debtor's operations for the month or applicable period, a current balance sheet and a executive summary of all business transacted during the month or applicable period. Debtor shall revise the reports and furnish such additional information or prepare such other business summaries as Secured Party may request from time to time. Secured Party shall also have the right to conduct such audits of the Debtor's books and records that Secured Party deems necessary or appropriate to ensure compliance with the provisions of this Agreement.

7.1.
    Secured Party may (a) exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all of the rights and remedies of a secured party under the Code; and (b) without limiting the generality of the foregoing, but subject to only the notice specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or elsewhere, at such price or prices and on such other terms as Secured Party may deem commercially reasonable, for cash or on credit or for future delivery. Debtors agree that, to the extent notice of sale shall be required by law, at least 30 days' notice to Debtors of the time and place of any public sale or the time after which any private sale is to be made shall constitute "reasonable notification" to it. Secured Party shall not be obligated to make any sale of the Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned without further notice to Debtor or the Debtor.

7.2.
    In the event that Secured Party elects to exercise its right, if any, to sell all or any part of the Collateral pursuant to Section 7.1, above, Debtors will, at their own expense and upon request by Secured Party, do or cause to be done all such other acts and things as may be necessary to vest good title to such Collateral in the purchaser thereof in compliance with applicable law. Debtors acknowledge that a breach of any of the covenants contained in this Section 7.2 may cause irreparable injury to Secured Party, that Secured Party shall have no adequate remedy at law in respect of such breach and, as a consequence, the covenants of Debtors contained in this Section 7.2 shall be specifically enforceable against Debtor and the Debtor, and Debtors hereby waive, to the extent such waiver is enforceable under law, and shall not assert any defenses against any action for specific performance of such covenants, except for the defense that no event of default has occurred.

7.3.
    Secured Party may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of a widely distributed standard price quotations, at any private sale).

7.4.
    Upon any such sale, Secured Party shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of Debtor and/or the Debtor which may be waived, and Debtor and the Debtor, to the extent permitted by law, hereby specifically waive all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted.

7.5.
    The notice (if any) of such sale required by Section 7.1, above, shall (a) in case of a public sale, state the time and place fixed for such sale, and (b)  in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale (provided that such notice complies with law). At any such sale the Collateral may be sold in one lot at an entirety or in separate parcels, as Secured Party may determine.

7.6.
    In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the selling price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case of any such failure, such Collateral may again be

sold upon like notice. Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests granted herein and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction.

7.7.
    Notwithstanding the provisions of Section 7.2, above, Debtors recognize that Secured Party may deem it impracticable to effect a public sale of all or any part of the Collateral and that Secured Party may, therefore, determine to make one or more private sales of any such Collateral to a restricted group of purchasers. Debtors acknowledge that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sales shall be deemed to have been made in a commercially reasonable manner.

7.8.
    Any cash held by Secured Party as the Collateral and all cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral shall be applied and accounted for by Secured Party as follows:

7.8.1.
    First, to the repayment of the reasonable costs and expenses, including reasonable attorneys' fees and legal expenses incurred by Secured Party in connection with (a) the administration of this Agreement, (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (c) the exercise or enforcement of any of the rights of Secured Party hereunder, or (d) the failure of Debtor and/or the Debtor to perform or observe any of the provisions hereof;

7.8.2.
    Second, at the option of Secured Party, to the payment or other satisfaction of any liens and other encumbrances upon any of the Collateral;

7.8.3.
    Third, to the reimbursement of Secured Party for the amount of any obligations of Debtor and/or the Debtor paid or discharged by Secured Party pursuant to the provisions of this Agreement, and of any reasonable expenses of Secured Party payable by Debtor and/or the Debtor hereunder;

7.8.4.
    Fourth, ratably to the satisfaction of the Obligations, first to accrued interest and then to principal;

7.8.5.
    Fifth, to the payment of any other amounts required by applicable law (including, without limitation, Section 9-504(1)(c) of the Code or any successor or similar applicable statutory provision); and

7.8.6.
    Sixth, the surplus proceeds, if any, to Debtor and the Debtor, ratably, or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct.

7.9.
    In the event that the proceeds of any such sale, collection or realization are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor shall be liable for the deficiency, together with interest thereon at the maximum rate then permitted by law from the date of sale, collection or realization, together with the costs of collection and the reasonable fees of any attorneys employed by Secured Party to collect such deficiency.

7.10.
    Upon written demand to Debtor from Secured Party, Debtor shall be deemed to have sold the Debtor and shall be bound by the provisions of the covenant not to compete attached hereto as EXHIBIT A, without any further action on the part of Debtor or Secured Party; provided, however, that Debtor shall execute any additional documents that Secured Party requests to give effect to this paragraph.

8.1.
    Debtors shall indemnify and hold harmless Secured Party from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities resulting from the gross negligence or willful misconduct of Secured Party.

8.2.
    Debtors will upon demand pay to Secured Party the amount of any and all costs and expenses, including the fees and disbursements of Secured Party's counsel and of any experts and agents, which Secured Party may incur in connection with (a) the custody (including escrow expenses), preservation, use or preparation of, or the sale of, collection or other realization upon, any Collateral; (b) the exercise or enforcement of any of the rights of Secured Party hereunder; (c) the failure by Debtor or the Debtor to perform or observe any of the provisions hereof, except expenses resulting from Secured Party's gross negligence or willful misconduct; and (d) the amount of any taxes which Secured Party may be or may have been required to pay by reason of the security interests herein granted or to free the Collateral from any liens thereon, except expenses resulting from Secured Party's gross negligence or willful misconduct. Any such amount not paid on demand shall bear interest at sixteen and three quarters percent (16.75%) per annum or the maximum amount permitted by law, whichever is less.

9.1.
    This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together constitute one and the same instrument, binding on all the parties hereto.

9.2.
    Any notices permitted or required hereunder shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivery of a legible copy was made personally or by facsimile transmission, or (b) or the first (1^st) business day following the date of delivery to an over-night courier for next-day delivery with charges prepaid or charged to the account of the person giving such notice, or (c) on the third (3^rd) business day after the date on which mailed by registered or certified mail, return receipt requested, addressed to the party for whom intended at the address set forth on the signature page of this Agreement or such other address, notice of which is given as provided herein.

9.2.1.
    Any party, in its sole discretion and for any reason, may reject the decision of the arbitration panel and seek adjudication of the dispute by giving written notice of its intention to do so within thirty (30) days after receipt of the written decision of the arbitrators and commencing appropriate legal proceedings to obtain adjudication of the dispute within thirty (30) days after the date on which it gives such notice.

9.2.2.
    Any party who rejects the decision of an arbitration panel and seeks to have a dispute submitted to adjudication by litigation following an arbitration proceeding as provided by Section 9.3.3, below, shall be obligated to pay the costs and reasonable attorneys fees incurred by the other party in such arbitration proceeding.

9.2.3.
    Any judicial action or proceeding commenced pursuant to this Section 9.3 shall be commenced and conducted in a state or federal court of competent jurisdiction situated in the county or judicial district in which the defendant in such action or proceeding has its corporate headquarters.

9.3.
    No waiver of any right hereunder shall be effective for any purpose unless in writing and signed by the party possessing said right. Any such written waiver shall not be construed to waive any subsequent right or other term or provision of this Agreement.

9.4.
    This Agreement shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators, assigns and legal representatives of each of them.

9.5.
    The parties agree that each party and its counsel have reviewed and revised this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement or any amendments of exhibits thereto. As used in this Agreement, the masculine, feminine and neuter gender and the singular or plural number shall each be deemed to include the other whenever the context indicates or requires.

9.6.
    This Agreement (a) constitutes the entire understanding of the parties concerning the matters set forth herein, and supersedes all prior and contemporaneous understandings, whether oral or written, concerning such matters, and (b) may not be modified or amended, except by an instrument signed by the party against whom enforcement of any such amendment may be sought.

9.7.
    If any action is commenced to construe or enforce this Agreement or the rights and duties created hereunder, then the party prevailing in that action shall be entitled to recover its attorneys' fees in that action and the costs and fees of enforcing any judgment entered therein.

9.8.
    The effective date of this Agreement shall be the date first written above.