Rudy 45 – ‘10KSB’ for 7/31/01 – EX-10.1

On:  Tuesday, 11/13/01   ·   For:  7/31/01   ·   Accession #:  1091818-1-500294   ·   File #:  0-29475

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Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report                                         43±   206K 
 2: EX-10.1     Equipment Lease                                       17±    63K 

EX-10.1   —   Equipment Lease
Exhibit Table of Contents

Exhibit 10.1                                                                    

                                                     No.____________
EQUIPMENT LEASE                                                                 

Lessor:                 Malahat Energy Corporation                              

Lessee:                 __________________________                              

Billing Address:________________          Delivery Address:_______________      
Street/Suite:___________________          Street/Suite:___________________      
City:___________________________          City:___________________________      
Province/State:_________________          Province/State:_________________      
Postal/Zip Code:________________          Postal/Zip Code:________________      
Attention:______________________          Attention:______________________      
Telephone #:____________________          Telephone #:____________________      
Facsimile #:____________________          Facsimile #:____________________      

Equipment:                                                                      
__________________________________________________________________________      
Item            |         Equipment         |         Serial Number             
#              |                           |                                  
________________|___________________________|_____________________________      
1              |                           |                                  
________________|___________________________|_____________________________      
2              |                           |                                  
________________|___________________________|_____________________________      
3              |                           |                                  
________________|___________________________|_____________________________      
4              |                           |                                  
________________|___________________________|_____________________________      

Term:     The term of this lease will be __________ months commencing on the    
Commencement Date and expiring on the Expiry Date, unless terminated earlier    
pursuant to this lease.                                                         

Commencement Date:__________________    Expiry Date:_________________           

Delivery and Installation Date:         __________________                      
Installation and Commissioning Cost:    $_________________                      

Supplements:                  Accepted                                          
-----------                   --------                                          
Genset Supplement             ________     Rent:            $__________/month   
Maintenance Supplement        ________     Taxes on Rent:   $__________         
Feedstock Supply Supplement   ________     Security Deposit:$__________         

Lessee:                                    Lessor:                              
By:     Signature  ___________________     By:     Signature  _______________   
     Print      ___________________             Print Name _______________

Title: ___________________                 Title: ___________________           
Date:  ___________________                 Date:  ___________________           

Lease Terms and Conditions                                                      

In consideration of their respective covenants set out below, Lessor and        
Lessee agree as follows:                                                        

ARTICLE 1 - DEFINITIONS AND INTERPRETATION                                      

1.1 Definitions.  Unless otherwise expressly provided, or unless the context    
otherwise requires, all capitalized words and phrases used in this lease shall  
have the following meanings and such meanings shall be equally applicable to    
both the singular and the plural forms of the terms defined:                    

(a) "Alteration" has the meaning specified in section 7.1.                      

(b) "Business Day" means a day which is not a Saturday or Sunday or a           
statutory holiday in the Province or State of the Delivery Address;             

(c) "Commencement Date" has the meaning specified on the cover page;            

(d) "Delivery Address" has the meaning specified on the cover page;             

(e) "Delivery and Installation Date" has the meaning specified on the cover     
page;                                                                           

(f)  "Equipment" has the meaning specified on the cover page, including all     
parts, components, attachments and accessories thereto and all other property   
and assets from time to time subject to this lease, together with all           
attachments, replacements, alterations, repair parts and components and all     
intellectual property rights with respect to any of the foregoing;              

(g) "Event of Default" has the meaning specified in Section 12.1;               

(h) "Expiry Date" has the meaning specified on the cover page;                  

(i) "Force Majeure" means any event or occurrence not within the control of     
the party claiming force majeure and which by the exercise of due diligence     
such party is unable to prevent or overcome, including, without limitation the  
generality of the foregoing, any act of God, strikes, lockouts or other         
industrial disturbances, acts of the Queen's enemies, sabotage, wars,           
blockades, insurrections, riots, epidemics, landslides, lightning,              
earthquakes, floods, storms, fires, washouts, arrests, restraints of rulers     
and peoples, civil disturbances, explosions, and orders of any court, board or  
governmental authority having jurisdiction.  A lack of funds or other           
financial cause specific to a party hereto shall not, in any circumstance be    
force majeure;                                                                  

(j) "Installation and Commissioning Cost" means the amount specified on the     
cover page;                                                                     

(k) "Lien" has the meaning specified in section 10.1;                           

(l) "Operating and Maintenance Manual" means Lessor's operating and             
maintenance manual for the Equipment;                                           

(m) "person" includes an individual, corporation, trust, partnership,           
governmental authority and any other entity;                                    

(n) "Prime Rate" means the rate of interest, expressed as a percentage per      
annum, declared from time to time by the main branch in Vancouver of the Royal  
Bank of Canada as its "prime rate", the intention being that the rate of        
interest hereunder shall fluctuate as and when such declared prime rate         
fluctuates;                                                                     

(o) "Rent" means the amount specified on the cover page;                        

(p) "Security Deposit" has the meaning specified in section 3.8;                

(q) "Stipulated Loss Value" for all or any part of the Equipment shall          
represent the replacement cost of all or any part of the Equipment;             

(r) "Supplements" means those of the Supplemental Agreements specified on the   
cover page accepted by Lessee from time to time during the Term, which          
Supplemental Agreements are each evidenced by a further agreement in writing    
between the parties;                                                            

(s) "Taxes" means any and all taxes, rates, duties, assessments, levies,        
license and registration fees and other public charges (excluding only federal  
and provincial or state taxes on net income or capital of Lessor and            
provincial, state or municipal place of business taxes and other similar taxes  
in respect of Lessor or its property other than the Equipment) which may at     
any time be charged or assessed directly or indirectly with respect to this     
lease or the Equipment, or Lessor's or Lessee's interest therein, or with       
respect to the use, leasing or operation of the Equipment, and all interest     
and applicable penalties with respect thereto, whether assessed, levied or      
charged by any municipal, provincial, state or federal government, and school   
board or any other public body;                                                 

(t) "Term" has the meaning specified on the cover page;                         

(u) "this lease", "herein", "hereunder", hereof" and similar terms refer to     
this lease as a whole and all Supplements accepted by the Lessee as indicated   
on the cover page, and not to any particular article, section, schedule or      
other subdivision of this lease.                                                

(v) "Waste" means any exhaust, mineral salts, residual ash or other solids,     
liquids or gases arising out of or in connection with, or resulting from the    
Equipment excluding materials obtained from the scrubbers to be recycled        
through the Equipment.                                                          

1.2 Interpretation                                                              

(a) In this lease, the singular includes the plural, the plural includes the    
singular, and any gender includes the other genders.                            

(b) References in this lease to an article, section, schedule or other          
subdivision are to the corresponding article, section, schedule or other        
subdivision of this lease, unless otherwise indicated.                          

(c) The use of headings and the subdivision of this lease into articles,        
sections, schedules and other subdivisions are for convenience of reference     
only and shall not affect the interpretation of this lease.                     

(d) This lease shall be governed by and construed and interpreted in            
accordance with the laws of the Province of British Columbia and the laws of    
Canada applicable therein and each party hereby irrevocably agrees to the       
exclusive jurisdiction of the courts of the Province of British Columbia in     
respect of all matters which may arise in respect of this lease.                

(e) Should any provisions of this lease be void or unenforceable it shall be    
severed from this lease and the remainder of this lease shall remain in full    
force and effect and shall be interpreted and construed as if the stricken      
provision had never formed part of this lease.                                  

(f) All dollar amounts referred to in this lease refer to  ______________       
dollars.                                                                        

(g) Except as contained in any Supplement accepted by the Lessee as indicated   
on the cover page, this lease constitutes the entire agreement between the      
parties with respect to the Equipment and its rental to and use by Lessee.      
Any discrepancy between the terms of this lease and a Supplement shall be       
resolved in favour of the Supplement.  There are no other terms, conditions,    
obligations, representations or warranties on the part of either party,         
whether oral, written, express, implied, statutory or otherwise, governing or   
affecting the transaction contemplated in this lease or which may give rights   
to Lessee or restrict the remedies and rights of Lessor.  Amendments to this    
lease must be in writing and executed by the parties hereto.                    

(h) The representations, warranties and covenants survive the expiration or     
sooner termination of the Term.                                                 

(i) The parties agree that the provisions of this lease have been negotiated    
by the parties and therefore the contra proferentum rule will not apply as a    
rule of construction of this lease.                                             

ARTICLE 2  - LEASE                                                              

2.1 Lease and Term.  Lessor leases to Lessee, and Lessee leases from Lessor     
the Equipment for the Term.  This lease cannot be cancelled except as           
expressly provided herein.                                                      

2.2 Title.  Title to the Equipment is and shall at all times remain vested in   
Lessor.  This agreement is one of lease only.  Lessee shall have no right,      
title or interest in the Equipment except the right to use and possess the      
same upon and subject to the terms and conditions contained in this lease.      
Lessor may, and Lessee shall if and as directed by Lessor, affix plates, tags   
or markings to the Equipment clearly indicating Lessor's ownership, and Lessee  
shall not remove, alter or conceal any such plates, tags or markings.  Lessee   
shall defend Lessor's title against any contrary claim asserted during the      
Term or at any other time by any person claiming through or against Lessee or   
arising out of or related in any way to this lease or Lessee's possession or    
use of the Equipment.                                                           

2.3 Delivery.  The Lessor shall, at the Lessee's expense, deliver the           
Equipment to the Delivery Address on the Delivery and Installation Date and     
pick-up from the Delivery Address and deliver the Equipment to a location of    
the Lessor's choice on the Expiry Date or sooner termination of the Term.       
Without limiting the generality of the foregoing, the Lessee shall pay all      
costs associated with the transportation of the Equipment to and from the       
Delivery Address.                                                               

ARTICLE 3  - LESSEE'S PAYMENT OBLIGATIONS                                       

3.1 Installation and Commissioning Cost.  The Lessee shall pay to the Lessor    
the Installation and Commissioning Cost upon successful installation and        
commissioning of the Equipment at the Delivery Address.                         

3.2 Rent.  Lessee shall pay to Lessor Rent during the Term and the Rent         
together with applicable Taxes on Rent will be payable in advance on the first  
day of each month.                                                              

3.3 Taxes.  Lessee shall promptly pay all Taxes, when due, to Lessor or to the  
proper governmental authority.                                                  

3.4 Interest.  All Rent and other amounts from time to time owing under this    
lease not paid when due shall bear interest, from the due date to the date of   
payment at the Prime Rate plus 4% per annum, compounded monthly, both before    
and after demand, default and judgment, which amounts shall be payable on       
demand.                                                                         

3.5 Net Lease.  This lease is a net lease and every cost and expense existing   
or arising with respect to the Equipment, the delivery thereof or Lessee's      
lease, possession or use thereof and all Taxes shall be borne by Lessee.  All   
Rent and other amounts from time to time owing hereunder are payable without    
abatement, withholding, set-off or reduction for any of the foregoing or for    
any claim or claims whatsoever which Lessee may assert against Lessor or        
against any other person for any reason, and whether arising under this lease   
or otherwise.                                                                   

3.6 Manner and Place of Payment.  All amounts to be paid by Lessee to Lessor    
hereunder shall be direct-deposited to such bank as Lessor shall designate in   
writing.  If any such amount is due to be paid on a day other than a Business   
Day, such amount shall be payable on the next succeeding Business Day.  Lessee  
acknowledges that any invoices for payments due under this lease sent to        
Lessee by Lessor shall be for Lessee's convenience only. Lessee's non-receipt   
of an invoice shall not relieve Lessee of its obligations to make any payment   
hereunder on the due date thereof.                                              

3.7 Security Deposit.  Lessee shall deposit with the Lessor the sum of two      
months Rent as a security deposit upon signing this lease (the "Security        
Deposit"), as security for the faithful performance by Lessee of all of its     
covenants and obligations hereunder, provided that                              

(a) the Lessor shall not be liable to the Lessee for interest on the Security   
Deposit;                                                                        

(b) if any portion of the Rent is at any time overdue and unpaid, or if Lessee  
fails to keep and perform any terms, covenants or conditions pursuant to this   
lease, then Lessor may but shall not be obliged to, apply any portion of the    
Security Deposit for loss or damage sustained or suffered by Lessor for         
Lessee's breach.  If the entire Security Deposit, or any portion if it, is      
appropriated and applied by Lessor, then Lessee will, upon demand, immediately  
remit to Lessor a sufficient amount in cash to restore the Security Deposit to  
the original sum deposited; and                                                 

(c) if Lessee complies with all of the terms, covenants and conditions and      
promptly pays all of the Rent and other amounts owing, the security deposit     
will be returned in full to Lessee within 60 days after the end of the Term.    
Lessor shall not be obliged to account to Lessee for any interest earned on     
the Security Deposit.                                                           

ARTICLE 4 - REPRESENTATIONS AND WARRANTIES                                      

4.1 Lessor's Representations and Warranties.  Lessor represents and warrants    
to Lessee that:                                                                 

(a) Lessor is a corporation duly incorporated, organized, and validly existing  
under the laws of Canada and is duly qualified to own the Equipment and to      
lease it to Lessee as provided in this lease;                                   

(b) Lessor has full power, authority and the legal right to enter into this     
lease and perform its obligations hereunder, and the execution and delivery by  
it of this lease and performance of its obligations hereunder have been duly    
authorized by all necessary corporate action on the part of Lessor and will     
not violate any provision of law or of the constating documents or by-laws of   
Lessor or result in a breach of or constitute a default under any agreement,    
indenture or other instrument to which Lessor is a party or by which Lessor or  
any of its property may be bound or affected;                                   

(c) This lease constitutes a legal, valid and binding obligation of Lessor;     
and                                                                             

(d) The Equipment shall have the capacity to convert approximately 6.0 tons     
(metric) per day of biodegradable materials of the type as selected by the      
Lessor into syngas to generate energy, yielding an average equivalent range of  
250 kilowatt hours per hour of energy.                                          

4.2     Exclusions.  Except as set forth in subsection 4.1, Lessor makes no     
representations or warranties in favour of Lessee, whether oral or written,     
express or implied, statutory or otherwise, with respect to Lessor, the         
Equipment, this lease or any other matter relating to this lease transaction.   
In that regard, and for greater certainty, Lessee acknowledges that (i) it has  
selected the Equipment without placing any reliance on Lessor or on Lessor's    
skill or judgment (ii) the Equipment is leased under this lease on an "as is"   
basis, (iii) there are no warranties, conditions, terms, representations or     
inducements, oral or written, express or implied, statutory or otherwise, made  
by or on behalf of Lessor or operating in favour of Lessee as to any aspect of  
the Equipment including, without limitation, as to its condition, operation,    
fitness for any particular purpose, durability or merchantability, or as to     
Lessor, this lease or any other matter related to this lease transaction, all   
of which are waived and excluded from this lease to the fullest extent          
permitted by applicable law, and Lessee agrees not to seek or claim the         
benefit thereof; and (iv) the sole fundamental obligation of Lessor under this  
lease is not to disturb the Lessee's quiet possession of the Equipment as long  
as Lessee is not in default under this lease.                                   

4.3     Lessee's Representations and Warranties.  Lessee represents and         
warrants to Lessor that:                                                        

(a)     Lessee is a corporation duly incorporated, organized and validly        
existing under the laws of its jurisdiction of incorporation and is duly        
qualified and holds all necessary licences, approvals, certificates and         
permits to enable it to lease the Equipment from Lessor and to operate the      
same as contemplated in this lease;                                             

(b)     Lessee has full power, authority and the legal right to enter into      
this lease and perform its obligations hereunder, and the execution and         
delivery by it of this lease and performance of its obligations hereunder have  
been duly authorized by all necessary corporate action on the part of Lessee    
and will not violate any provision of law or of the constating documents or     
by-laws of Lessee or result in a breach of or constitute a default under any    
agreement, indenture or other instrument to which Lessee is a party or by       
which it or any of its property may be bound or affected, or permit any lender  
to accelerate or demand repayment of any material amount of indebtedness of     
Lessee;                                                                         

(c)        this lease constitutes a legal, valid and binding obligation of      
Lessee; and                                                                     

(d)     all consents, authorizations and approvals of third persons, if any,    
necessary with respect to this lease and to performance by Lessee of its        
obligations hereunder have been obtained.                                       

ARTICLE 5 - USE                                                                 

5.1 Location.  Lessee shall keep the Equipment at the Delivery Address and      
shall not remove the Equipment from such location during the Term without       
Lessor's prior consent, which consent shall not be unreasonably or arbitrarily  
withheld or delayed.                                                            

5.2 Compliance With Laws.  Lessee shall at all times and at its own expense     
comply with all applicable statutes, laws, regulations, orders and rules,       
including without limitation, regarding environmental matters, present or       
future, and the requirements of any insurance policies and underwriters         
relating to the ownership, lease, possession, use, operation, maintenance,      
alteration, storage, repair, delivery, return or other disposition of all and   
any part of the Equipment and Waste.                                            

5.3 Maintenance, Use and Inspection.                                            

(a) Lessee shall at all times and at its own expense, maintain the Equipment    
in good mechanical and working order, repair, condition and appearance          
(reasonable wear and tear from proper use only excepted).  Lessee shall         
promptly make any and all necessary repairs and replacements, including         
repairs and replacements, to the Equipment, and shall furnish or obtain and     
install any and all parts, components, accessories and servicing required to    
keep the Equipment in the state required by this lease.  Before undertaking     
any maintenance, repairs or replacements to the Equipment, Lessee shall first   
consult with Lessor, and to the extent authorized by Lessor, Lessee may         
undertake such maintenance, repairs or replacements by competent and duly       
qualified persons approved by Lessor.  If the Lessor so chooses, the Lessor     
may at the Lessee's expense elect to undertake or engage others to undertake    
the necessary maintenance, repairs or replacements, in each case provided the   
Lessor ensures such maintenance, repairs or replacements are done promptly and  
with the minimum amount of disruption to the Lessee's business.                 

(b) Lessee shall ensure that the Equipment is not exposed to hazardous          
materials which may impair the efficiency or destroy the functionality of the   
Equipment.  Lessee shall cause the Equipment to be operated by competent and    
duly qualified personnel only, and for proper business purposes, and in         
compliance with all of Lessor's recommendations and instructions in the         
Operating and Maintenance Manual and with all terms and provisions of this      
lease.                                                                          

(a) (c) Lessor, its employees and agents shall have and be permitted to have    
access to the Equipment and the right to enter upon any lands or premises       
where any part of the Equipment may be located at any time and from time to     
time for the purpose of inspecting, maintaining, repairing or replacing the     
Equipment.                                                                      

(a) Lessor shall notify the lessee promptly of updates to the operating and     
maintenance manual, if any, and lessee shall at all times maintain the          
contents of the operating and maintenance manual in good order.(d)              

5.4 Removal of Waste.  The Lessee shall own and be responsible for the removal  
and disposal of all Waste in compliance with Section 5.2.                       

5.5 Excess Energy.  Lessee shall be responsible for obtaining all approvals     
and permits and shall bear all risk with respect to any sale of excess energy   
(including without limitation electricity, steam and synthesized gas) arising   
out of or in connection with or resulting from the Equipment.                   

ARTICLE 6 - GREENHOUSE GASES                                                    

6.1 Definitions. Unless otherwise expressly provided, or unless the context     
otherwise requires, all capitalized words and phrases used in this Article      
shall have the following meanings and such meanings shall be equally            
applicable to both the singular and the plural forms of the terms defined:      

(a) "Convention" means the United Nations Framework Convention on Climate       
Change.                                                                         

(b) "ER" or "Emission Reduction" means a reduction, avoidance, sequestration    
or mitigation of GHG emissions;                                                 

(c) "ERB" or "Emission Reduction Benefits" means all rights, benefits, title    
and interest in and to, arising out of or in connection with, or resulting      
from, an ER, whether such right, benefit, title or interest is in existence as  
of the date of this lease or arises thereafter, including the period after the  
Term;                                                                           

(d) "GHG" means carbon dioxide, methane, nitrous oxide, hydrofluorocarbons,     
perfluorocarbons, and any other gas substance that is the subject of the        
Convention and related protocols, treaties, agreements and instruments;         

6.2 Ownership of Greenhouse Gas Emission Reductions.  By signing this           
Agreement, Lessee transfers, surrenders and quit claims to Lessor all of        
Lessee's right, title and interest in any and all ERs and any and all ERBs      
arising therefrom, if any, arising out of or in any way related to the          
Equipment including without limitation, any and all ERs and ERBs arising from   
sale of excess energy by Lessee.  Lessee agrees to take no action and to        
receive no benefit, credit or interest contrary to this Agreement or that in    
any way prejudices or impairs Lessor's ability to use or enjoy its right,       
title ,interest and benefits in any and all such ERs and ERBs.                  

6.3 Measurement and Verification ERs.  Lessee shall, at Lessor's Cost, provide  
Lessor with access to such of the Lessee's books, records and other             
information both during and after the Term, as the Lessor may reasonably        
require to document,evidence or measure any and all ERs which may arise out of  
or are in any way related to the Equipment.                                     

6.4 Further Assurances.                                                         

(a) At the request and cost of Lessor, Lessee shall from time to time, either   
before, during or after the Term of the lease, do all such acts and things as   
may be necessary to qualify all of the ERs which may arise out of or are in     
any way related to the Equipment for any available ERBs and, subject to         
subsection (b), to obtain and secure such ERBs forLessor.                       

(b) At the request and cost of Lessor, Lessee shall from time to time, both     
during and after the Term, execute and deliver or cause to be executed and      
delivered to Lessor all such further documents and instruments and do all such  
further acts and things as may be necessary for more perfectly and absolutely   
assigning, transferring and assuring to and vesting in Lessor good and          
marketable title to any and all ERs which may arise out of are in any way       
related to the Equipment and any and all ERBs arising therefrom.                

ARTICLE 7  -ALTERATIONS, ADDITIONS AND IMPROVEMENTS                             

7.1 Alterations, Additions and Improvements.                                    

(a) Lessor shall be entitled, at its expense, to make alterations, additions    
or improvements (each individually referred to as an "Alteration") to the       
Equipment provided the Lessor ensures such Alterations are done with the        
minimum amount of disruption to the Lessee's business..                         

(b) Lessor shall give Lessee prior written notice of any Alterations to the     
Equipment proposed to be made by it (repairs, replacements and maintenance of   
the nature contemplated by section 5.3 excepted).  All Alterations shall upon   
the earlier of installation or completion become the property of, and the same  
are conveyed to, Lessor without requirement of any further act or formality,    
and thereafter all such Alterations shall for all purposes be and be deemed to  
be part of the Equipment.  Lessee shall not be entitled to modify or remove     
any Alterations which become the property of Lessor.  Lessor, its employees     
and agents shall have and be permitted to have access to the Equipment and the  
right to enter upon any lands or premises where any part of the Equipment may   
be located at any time and from time to time for the purpose of making          
Alterations to the Equipment                                                    

7.2 Lessee shall, if so requested by Lessor, execute and deliver to Lessor      
such bills of sale, assignments, deeds and other documents and instruments as   
may be requested by Lessor to evidence the ownership of  Lessor of title in     
and to any Alterations which become the property of Lessor as contemplated in   
Section 7.1.                                                                    

ARTICLE 8 - LOSS, DAMAGE AND INSURANCE                                          

8.1 Loss or Damage, Restoration and Rebuilding, Expropriation.                  

(a) Lessee assumes the entire risk of loss (including loss or interruption of   
use) of or damage to the Equipment from any cause whatsoever.  No loss or       
damage (with the exception of loss or damage caused by the gross negligence or  
wilful misconduct of Lessor), shall affect or impair the obligations of Lessee  
under this lease including but not limited to the obligation to pay Rent        
unabated and without interruption, all of which shall continue in full force    
and effect subject to subsection 8.1(c).                                        

(b) If the Equipment is destroyed, expropriated or confiscated, or is damaged   
so that it cannot reasonably be repaired (as determined by Lessor), Lessee      
shall promptly notify Lessor and Lessee shall pay to Lessor all amounts         
required by Lessor to replace the Equipment or the part so destroyed, or, at    
the Lessor's option, on the next Rent payment date pay to Lessor, including     
the Rent payment due on such date, the applicable Stipulated Loss Value for     
the Equipment or such part.                                                     

(c) Upon payment of the Stipulated Loss Value pursuant to subsection 8.1(b) in  
respect of the Equipment, and provided Lessee is not then in default            
hereunder, this Lease shall terminate.  In the event that Lessee is required    
to pay Stipulated Loss Value in respect only of part of the Equipment, then     
following payment thereof Rent shall be adjusted to a lower amount as           
determined by Lessor.                                                           

8.2 Insurance.  Lessee shall obtain and maintain, at its expense and for the    
duration of the Term, insurance against loss, damage or destruction of the      
Equipment and against such other risks as Lessor may reasonably require on      
such terms and against such risks in accordance with prudent business           
practices prevailing in the energy industry and having regard to the            
locations, age and character of the Equipment and with insurers acceptable to   
Lessor.  Such insurance shall be in an amount not less than the Stipulated      
Loss Value from time to time of the Equipment as determined by the Lessor in    
its absolute discretion.  Lessor shall have no obligation to insure against     
any loss, damage or liability whatsoever.  All policies and all renewals        
thereof shall name Lessor and Lessee jointly as loss payees.  Insurance         
proceeds for damage to or destruction of the Equipment shall be paid to Lessor  
to reimburse it for the costs of repair or replacement under Section 8.1, as    
the case may be, or applied towards satisfaction of Lessee's obligation to pay  
the Stipulated Loss Value of the Equipment.                                     

8.3 Third Party Liability.  Lessee shall insure at its expense both Lessor and  
Lessee against liability for all loss, damage, injury or death to persons or    
property arising directly or indirectly out of the possession, operation,       
delivery, return, storage or use of the Equipment during the Term or            
thereafter and prior to its return to Lessor, by whomsoever caused and whether  
or not caused by negligence under comprehensive general liability policies in   
such amounts and with such insurers as are acceptable to Lessor.  Each          
liability policy maintained in accordance with this section 8.3 shall provide   
that all provisions thereof (except limits of liability) shall operate as if    
they were a separate policy covering each insured.                              

8.4 Proof of Insurance; Notice of Change.  Certificates confirming existence    
of the insurance coverage required to be maintained by Lessee under sections    
8.2 and 8.3 and all insurance policies shall be deposited with Lessor at all    
times and shall be provided to Lessor on before the Delivery and Installation   
Date, but Lessor shall not be deemed to have reviewed the same or the           
sufficiency thereof except where it has so confirmed in writing.  Lessee shall  
give Lessor immediate notice of any reduction in the limits of liability or     
property insurance maintained by Lessee and of any notice of cancellation or    
termination, or of intent to cancel or terminate, in respect of any such        
policy.  Each policy shall also require the insurer to give Lessor not less     
than 30 prior days notice of cancellation or termination.  In the event of      
issuance of notice of cancellation or termination, Lessee shall immediately     
provide Lessor with satisfactory evidence of replacement insurance complying    
with this lease.                                                                

8.5 Failure to Perform Covenants.  If Lessee fails to insure, to pay Taxes or   
to keep the Equipment and the respective interests of Lessor and Lessee         
therein free and clear of all claims, proceedings and Liens as required by      
this lease, or to perform or observe any other covenant or condition of this    
lease, then in addition to its other remedies, Lessor may, but shall not be     
obligated to pay to insure, pay Taxes, pay to discharge, release or vacate any  
adverse claim or Lien against all or any part of the Equipment or to release    
the Equipment from proceedings, or pay any other sum or otherwise take such     
steps and proceedings as may in its opinion be required to cure or partially    
cure any default by Lessee hereunder.  The cost of such actions and all         
amounts so paid and incurred by or on behalf of Lessor shall be payable to      
Lessor on demand together with interest at the rate stated in section 3.4 from  
the date the same is paid by Lessor to the date of payment by Lessee.           

ARTICLE 9 -INDEMNIFICATION AND EXCLUSION OF LIABILITY                           

9.1 Lessee's Indemnification.  Lessee shall indemnify and hold harmless         
Lessor, its directors, officers, employees, shareholders, representatives,      
consultants and agents from any liability described in section 8.3 and any and  
all losses, claims, actions, suits, proceedings, costs, expenses, damages and   
liabilities, including legal fees on a solicitor and his own client basis,      
arising out of, connected with, or resulting from the Equipment including       
those relating to the possession, use, lease, operation, maintenance,           
alteration, repair, delivery, storage, return or other disposition of all or    
any part of the Equipment, arising out of, connected with or resulting from     
harm or injury suffered by Lessee or its directors, officers, employees,        
shareholders, representatives and consultants, or from property damage or       
destruction and any breaches by Lessee of any of the representations,           
warranties, terms, covenants or conditions under this lease.  This indemnity    
shall not be affected or terminated by virtue of the expiry of the Term or      
sooner termination of this Lease but shall remain in full force and effect      
until all obligations of Lessee to Lessor have been satisfied.                  

9.2 Lessor's Indemnification.  Lessor shall indemnify and hold harmless         
Lessee, its directors, officers, employees, shareholders, representatives,      
consultants and agents from any and all losses, claims, actions, suits,         
proceedings, costs, expenses, damages and liabilities, including legal fees on  
a solicitor and his own client basis, arising out of, connected with, or        
resulting from any breaches by Lessor of any of the representations,            
warranties, terms, covenants or conditions under this lease.                    

9.3 Exclusion of Liability.  Neither party shall be liable to the other party   
for indirect or consequential loss or for loss of profit, regardless of how     
the liability arises, including without limitation via negligence, gross        
negligence or breach of contract.                                               

ARTICLE 10  - LIENS AND ENCUMBRANCES; RECORDATION AND FILING                    

10.1 Liens and Encumbrances.  Lessee shall not at any time during the Term      
permit any builder's, laborer's, material supplier's or other similar lien or   
charge to stand against the whole or any part of the Equipment.  In addition,   
at all times during the Term and so long as any amount owing hereunder shall    
remain unpaid, Lessee shall keep the Equipment free and clear of all other      
liens, charges, encumbrances, security interests, seizures and rights or        
claims of third parties of any kind or nature (any such lien, charge,           
encumbrance, security interest, seizure and third party right and claim of any  
kind or nature being referred to as a "Lien"), except for any Lien arising out  
of claims against the Lessor unrelated to this transaction and to the           
Equipment.  Notwithstanding the foregoing Lessee may, upon written notice to    
Lessor, refrain from paying and discharging any Lien if:                        

(a) the amount, applicability or validity thereof is being contested by Lessee  
in good faith; and                                                              

(b) Lessee shall have deposited with Lessor or with a court having              
jurisdiction or with the appropriate governmental authority such amount by way  
of cash, certificates of deposit or other security, if any, as may be required  
by such court or governmental authority or by applicable law in order to        
permit Lessee to contest the same, and shall have provided to Lessor, if and    
whenever requested by Lessor, with evidence satisfactory to Lessor that the     
effect of such proceedings is to postpone or avoid the enforcement of the Lien  
and forfeiture of any part of the Equipment.                                    

However, upon final determination of such proceedings Lessee shall immediately  
pay and satisfy all costs, penalties, interest or charges payable by it in      
connection with the Lien and such proceedings.                                  

10.2 Recordation and Filing.  Lessee shall at its own expense, do, execute,     
acknowledge or deliver all such further things, agreements, documents and       
conveyances as may from time to time be requested by Lessor to give effect to   
or better protect the rights of Lessor hereunder, including but not limited to  
completion of such public registrations of or with respect to this lease and    
Lessor's rights hereunder as Lessor may require.  Lessor shall be permitted to  
file and re-file Personal Property Security financing statements or notices of  
similar effect with respect to the Equipment in all applicable jurisdictions.   

ARTICLE 11  - RETURN OF EQUIPMENT                                               

11.1 Time and Place of Return.  At the end of the Term or sooner termination,   
and at Lessee's expense, Lessor shall pick up and return the Equipment to the   
Lessor's nearest manufacturing facility.                                        

11.2 Equipment Return Condition.  The Equipment shall be returned to Lessor at  
the end of the Term in the same condition it was in on the Commencement Date.   
If at the termination of this lease the Equipment is not in the condition       
required by this lease, Lessor may repair or replace the same or any part       
thereof as may in Lessor's judgement be necessary to place the Equipment in     
the required condition.  Lessee shall pay the costs of all such repairs and     
replacements on demand with interest at the rate stated in section 3.4.         

11.3 Quiet Enjoyment.  So long as Lessee is not in default, Lessor shall not    
disturb Lessee's quiet enjoyment and possession of the Equipment during the     
Term except as may be permitted by this lease.                                  

ARTICLE 12  - EVENTS OF DEFAULT AND REMEDIES                                    

12.1 Events of Default.  Each of the following shall constitute an event of     
default (an "Event of Default") under this lease:                               

(a) if any amount owing under this lease is past due;                           

(b) if Lessee assigns this lease or sublets, transfers, surrenders or loses     
possession (except by theft) of any of the Equipment, whether by seizure,       
expropriation, abandonment or otherwise;                                        

(c) if Lessee makes an assignment for the benefit of creditors;                 

(d) if Lessee states in writing its inability to pay its debts as they fall     
due or demonstrates an intention to cease carrying on business;                 

(e) if a receiver, receiver-manager, trustee or similar official is appointed   
for Lessee or any of its property which appointment is not contested by Lessee  
or which, if contested, is not vacated within 30 days of the appointment;       

(f) if a petition in bankruptcy or other proceeding or application for          
reorganization or liquidation of Lessee under any federal or provincial law is  
filed or commenced by or against Lessee which is not contested by Lessee or     
which, if contested, is not discharged within 30 days of filing;                

(g) if Lessee suspends business, or transfers to one or more other entities     
all or a substantial part of Lessee's property, or seeks any proposal,          
arrangement or compromise with its creditors under the Bankruptcy Act           
applicable within its federal, state or provincial jurisidiction or any other   
statute or otherwise;                                                           

(h) if Lessee commits an act of bankruptcy;                                     

(i) if Lessee fails to comply with or to perform any other term of this lease   
provided:                                                                       

(i) Lessee has been given notice of such failure by or on behalf of Lessor and  
a period of 7 days has elapsed from the date of such notice without Lessee      
having cured the same, or                                                       

(ii) where by its nature such failure is capable of being cured but is not      
capable of cure within 7 days, Lessee has not proceeded diligently to cure      
such failure or, in any event, if such failure has not been cured within 14     
days of such notice.                                                            

12.2 Consequences of Default; Remedies.  Upon the occurrence of any Event of    
Default, Lessor may, subject to any provision of applicable law which cannot    
be waived:                                                                      

(a) take any proceedings and pursue any remedies available to it under this     
lease, at law, equity or by statute to compel performance by Lessee of its      
obligations under this lease or to cure any default by Lessee and, or in the    
alternative, to recover damages;                                                

(b) with or without terminating this lease, enter personally, or by agents or   
attorneys, upon any premises where the Equipment or any part thereof may be     
located and repossess all or any part of the Equipment without any prior or     
further demand, notice, court order or other process of law, and may use such   
force as may be lawful and as circumstances may require, and Lessee releases    
Lessor from all liability for damage occasioned by such repossession and        
agrees to indemnify and save Lessor harmless against all claims for such        
damage;                                                                         

(c) as agent for Lessee, without terminating this lease and without in any way  
releasing Lessee from any of its obligations hereunder, re-lease the Equipment  
for such period and upon such terms as Lessor deems fit and apply the net       
proceeds of such re-leasing against amounts payable hereunder (including        
amounts payable under paragraph 12.2(f));                                       

(d) elect to terminate this lease, in which event Lessor may dispose of the     
Equipment in whole or in part, whether by public sale, private sale, lease or   
otherwise, and at such time and place and upon such terms and conditions        
(including sale for deferred payments) as are commercially reasonable in the    
circumstances;                                                                  

(e) recover from Lessee, and Lessee shall immediately pay to Lessor on demand,  
the difference between the total of rentals to be received by Lessor from any   
third party lessee of the Equipment for the balance of the Term, or the         
purchase price at a sale, lease or other disposition, as the case may be        
pursuant to paragraphs (c) or (d) above, and the total unpaid Rent which would  
have otherwise been payable hereunder for the balance of the Term, discounted   
at 5% to present value;                                                         

(f) recover from Lessee, and Lessee shall immediately pay to Lessor on demand,  
all costs incurred by Lessor in connection with the enforcement of its rights   
and remedies under this lease, including but not limited to costs incurred in   
selling, re-leasing or otherwise disposing of repossessed Equipment; and        

(g) recover from Lessee, and Lessee shall immediately pay to Lessor on demand,  
interest on all sums referred to in paragraphs (a) through (f) at the rate      
stated in section 3.4 from the date of the Event of Default (or in the case of  
costs referred to in paragraph (f), from the date the same are incurred) until  
payment in full by Lessee.                                                      

12.3 Exercise of Remedies.  The remedies specified in this lease are in         
addition to any other rights Lessor may have at law, equity or under this       
lease, and Lessor may exercise any one or more of such rights successively or   
concurrently, provided that Lessor may not be compensated twice for the same    
damages suffered by it.                                                         

ARTICLE 13 - FORCE MAJEURE                                                      

13.1 Force Majeure.                                                             

(a) If either party is prevented from or delayed in performing any of its       
obligations under this lease, in whole or in part, by reason of Force Majeure,  
such party shall be excused from performance for so long as and to the extent   
that Force Majeure shall so prevent such performance, provided that such party  
uses reasonable efforts to restore its ability to perform its obligations       
hereunder.  Any party claiming Force Majeure will, with reasonable promptness,  
give to the other party notice of the cause of the Force Majeure and its        
expected duration.                                                              

(b) If the Lessee is wholly unable to operate the Equipment as a result of an   
event of Force Majeure, then for so long as the Equipment is inoperable and     
cannot be repaired or replaced as the Lessee may be obligated to do in          
accordance with the provisions of this lease, and only during such period, the  
Lessee's obligation to pay Rent and Taxes applicable to Rent shall be           
suspended.                                                                      

(c) With the exception of 13.1(a) and (b), this lease shall not terminate and   
the obligations of Lessee shall not be affected by reason of any defect in or   
damage to all or any part of the Equipment, loss of possession or use of the    
Equipment in whole or in part from any cause whatsoever, the prohibition or     
other restriction against use of all or any part of the Equipment by Lessee or  
any other person, interference with such use by any person, the invalidity or   
unenforceability or lack of due authorization of this lease by Lessee or        
Lessor.  It is the intention of the parties that Rent and all other amounts     
for which payment is provided or required in this lease shall continue to be    
payable as herein provided unless the Lessee's obligation to pay the same is    
terminated pursuant to an express provision of this lease.                      

ARTICLE 14 - MISCELLANEOUS                                                      

14.1 Notices.  Any direction, notice or invoice that any party may be required  
or may desire to give to the other shall be in writing and shall be delivered   
or sent by facsimile or courier to the other party addressed as follows:        

If to Lessor, then to:                                                          

Malahat Energy Corporation                                                      

6473 - 64th Street                              
Delta, British Columbia                         
Canada V4K 4E2                                  

Fax No.:        1-604-946-3098                                                  

Attention:      Ben Dulley                                                      

If to the Lessee, then to the Billing Address specified on the cover page.      

Either of the parties may by notice to the other change its address. Any        
notice or invoice delivered or sent by facsimile or courier shall be deemed to  
have been received by the addressee on the Business Day after it was so         
delivered or sent by facsimile or courier.  Notwithstanding the foregoing,      
invoices for Rent and other costs and expenses to be charged to Lessee may be   
sent by mail in which event such will be deemed received on the fourth day of   
such mailing.                                                                   

14.2 Assignment.                                                                

(a) Lessee shall not assign any of its rights hereunder nor sublet, transfer,   
attach as a fixture to real property, nor deliver possession of (except for     
purposes of repair) the Equipment. No purported assignment, sub-letting,        
transfer, attachment nor delivery by Lessee in contravention of this            
subsection shall be of any effect as against Lessor.  Lessee agrees that any    
change of control of Lessee shall be deemed to be an assignment by the Lessee,  
requiring the prior written consent of the Lessor.  For the purposes of this    
paragraph, "change of control" means a change, directly or indirectly, of the   
control of the Lessee or of legal or beneficial ownership of more than 50% of   
the aggregate voting securities of the Lessee and "control" includes the right  
to exercise, directly or indirectly, a majority of the votes which may be cast  
at a general meeting of the Lessee or the right to elect or appoint, directly   
or indirectly, a majority of the directors of the Lessee.                       

(b) Lessor may assign its rights or transfer any of its obligations under this  
lease, or both, in whole or in part without notice to Lessee, provided that     
Lessee shall be bound by any such assignment according to its terms only upon   
receipt of notice thereof.  Lessee shall in no event raise against any          
assignee of Lessor any claims Lessee may have against Lessor.  Lessee accepts   
any assignment made by Lessor in favour of a third party and agrees to execute  
and deliver to any such assignee an acknowledgment or such other documentation  
including any hypothecation, financing or leasing documentation with respect    
to this lease as Lessor or its assignee may reasonable request.                 

14.3 Confidentiality.  Lessee shall keep all workings of the Equipment, the     
Operating and Maintenance Manual, and all other documents and information       
provided by Lessor relating to the Equipment confidential.                      

14.4 No Waiver Operates to Waive Future Defaults.  No covenant or condition of  
this lease to be performed or observed by Lessee can be waived except by        
written consent of Lessor.  Forbearance by Lessor in any regard shall not       
constitute a waiver.  Until complete performance or observance by Lessee of     
each covenant or condition, Lessor shall be entitled to invoke any remedy       
available to Lessor under this lease and at law or equity, despite any prior    
forbearance.  No waiver of a single default shall be deemed a waiver of any     
other, nor shall any single or partial exercise of any remedy preclude any      
further exercise thereof or of any other remedy of Lessor.                      

14.5 Lessee's Waiver.  Except as may be prohibited by law, and to the extent    
the same extends to and relates to this lease as amended, modified or           
supplemented or any security collateral hereto, Lessee waives the benefit of    
all provisions of any applicable statutes and regulations which would in any    
manner affect, restrict or limit the rights of Lessor hereunder including,      
without limitation, as the same may be amended, supplemented, re-enacted,       
substituted or replaced from time to time.  Lessee also waives the right of     
any statutory exemption from execution or seizure, and the right to demand      
security for costs in the event of litigation.                                  

14.6 Further Assurances.  The parties shall execute and deliver such            
additional documents in form and substance mutually satisfactory to both        
parties, and shall cause such additional action to be taken as, in the          
reasonable opinion of the other party, may be necessary or desirable to fully   
effect, evidence or carry out the provisions of this lease and the              
transactions contemplated.                                                      

14.7 Enurement.  This Agreement shall be binding upon and enure to the benefit  
of the parties hereto and their respective successors and permitted assigns.    

14.8 Counterparts and Facsimiles.  This Agreement may be executed in one or     
more counterparts, in original form or by electronic facsimile, each of which   
shall be deemed to be an original and all of which taken together shall be      
deemed to constitute one and the same instrument, with the same effect as if    
the signatures thereto were upon the same instrument.                           

14.9 Time of Essence.  Time is of the essence of this lease and of the terms    
and conditions hereof.