
Quoting
Mr. Knowitall
The Acquino notes that "The mortgage entered into by the defendant to fund the purchase of the property recites that it is 'improved by a 1 or 2 family dwelling'", and also notes that "There is no showing whether the apartment was in a cellar or a basement under Multiple Dwelling Law § 4 (37) and (38), respectively." The court found that in the context of that lawsuit, it didn't matter:
The court found that a rental agreement could not be enforced through the courts, whether or not the house was a MDU: If the house was a MDU, the collection of rent would be barred by statute; if not, the collection of rent would be barred by the fact that the rental agreement was an unlawful contract that the courts would not enforce. The court also found that although the unit was unlawful, the tenant was not entitled to recover from the landlord the rent she had paid to reside in the unit. Her recovery was for the amount of the security deposit and her moving costs, incurred after the apartment was declared unlawful. Pickering largely accords with Acquino, as although it finds rent enforceable during the period in which the tenant is in residence, the tenant is free to end the tenancy at any time based upon the illegality of the unit with no further obligation to the landlord.
Acquino did not involve an attempt to recover rent from the former tenant, as opposed to an effort to keep the security deposit, and the biggest difference between Acquino and Pickering is that the Acquino court found that the landlord of an illegal unit had no right to keep any portion of the security deposit while the Pickering court found no such constraint. However, unlike in Pickering where the security deposit was applied to rent, the landlord in the Acquino court was attempting to keep the lion's share of the security deposit over allegations of damage to the unit, and the Acquino court noted also that the landlord had presented no evidence of damage. Also, although the Acquino court implies that it might not enforce rent owed to the landlord for a period prior to the tenant's vacating the unlawful unit, that issue was not before the court.
It would be foolish for a landlord to rent an illegal unit in NYC in defiance of Acquino, as it's quite possible that under the facts of the case the local trial court would be able to distinguish Pickering, and it's also possible that the case would be appealed with the First Judicial Department rejecting the reasoning of Pickering. It is also foolish for any landlord to ignore the fact that a tenant is not paying rent, rather than seeking eviction of the tenant as soon as nonpayment becomes an issue, although any landlord who wants to evict a tenant from an illegal apartment would be wise to be working through an attorney.