(20) Commitments and Contingencies

Operating Leases:

Mid Penn entered into a non-cancelable operating lease agreement to lease approximately 2,500 square feet of retail banking space in the downtown Harrisburg area through July 2020. This lease has an escalation clause increasing the annual base rent by 3.0% each year, which began August 1, 2015. Mid Penn also has a non-cancelable lease on a drive-up ATM site in Halifax, PA that runs through October 2018. Mid Penn has a non-cancelable operating lease agreement with a related party to lease approximately 5,900 square feet of office space on Derry Street in Harrisburg. The initial term ended in November 2014. Mid Penn has the option to renew this lease for two additional three-year periods and has exercised the first of these options, extending the term of the lease through November 2017.

Mid Penn entered into a non-cancelable operating lease agreement to lease two office suites; one approximately 2,350 square feet and the second approximately 7,000 square feet, on North Front Street in Harrisburg. The initial lease term extends through February 2020 and can be renewed for one additional three-year period. This lease has an escalation clause increasing the annual base rent by 2.0% each year. Mid Penn has a non-cancelable operating lease agreement with a related party to lease a retail banking property located on Simpson Ferry Road in Mechanicsburg, with the initial term of 20 years. Mid Penn has the option to renew this lease for two additional five-year periods. This lease has an escalation clause increasing the annual base rent by 2.0% each year. Mid Penn also has a non-cancelable operating lease agreement to lease a retail banking property located on South Market Street in Elizabethtown, with the initial term extending through December 2019. Mid Penn has the option to renew this lease for two additional five-year terms.

Through the acquisition of Phoenix, Mid Penn assumed four additional operating leases. The first is a non-cancelable operating lease agreement to lease a retail banking property located on Main Street in Conyngham with the initial term extending through July 2020. Mid Penn has the option to renew this lease for three additional five-year terms. The second and third are non-cancelable operating lease agreements with a related party to lease approximately 6,000 square feet and an additional 3,000 square feet of office space on Route 61 South in Rockwood. The initial lease terms extend through March 2021. Mid Penn has the option to renew these leases for two additional five-year terms. Both leases contain escalation clauses stating the annual rent payment is the greater of either the rent payment listed in the lease or the base rent increased by the change in the Consumer Price Index (“CPI”) during the year. The fourth is a non-cancelable operating lease agreement with a related party to lease a retail banking property located on South Lehigh Avenue in West Mahanoy Township with the initial term equal to the lessor’s amortization term for the lessor’s property development loan with Mid Penn. Mid Penn has the option to renew for two successive five-year terms. This lease has an escalation clause effective after the end of the lessor’s original loan amortization, which increases the annual base rate by the change in the CPI during the year.

Minimum future rental payments under these operating leases as of December 31, 2015 are as follows:


(Dollars in thousands)
	Lease Obligation		Obligation to Related Parties
2016		715		319
2017		734		325
2018		745		329
2019		746		332
2020		438		335
thereafter		4,556		4,556
	$	7,934	$	6,196

Rental expense in connection with leases in 2015, 2014, and 2013 were $627,000, $151,000, and $121,000, respectively.

Litigation:

Mid Penn is subject to lawsuits and claims arising out of its normal conduct of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of Mid Penn.