Authorities have been aware of illegal residential tenancies in a Wellington office block since 2013 but have chosen not to evict those living there.
The earthquake-prone six storey building owned by Craig Relph is on the corner of Dixon St and Victoria St.
Inside, some floors have been converted into accommodation similar to a hostel where bathrooms and kitchens are shared between several residents.
The state of the building has sparked concern among local business owners.
One of them said the conditions were unacceptable.
"Nothing that any decent human being would live in."
He said the upper floors of the building were noisy, regularly flooded and rubbish was consistently scattered across the ground-level foyer.
Wellington City Council building compliance and consents principal technical lead Peter Burnet said there were outstanding issues but it was "probably better than living on the pavement".
He said urgent fire safety work was undertaken when the council was first made aware of the tenancies and now there was no reason to believe the building was dangerous.
Burnet said the decision was made to work with the owner on his outstanding paperwork, rather than leave tenants out on the street.
"That's what councils have to weigh up, where would the money be better spent? Working with these people to bring the building up to a better level of compliance, or doing a prosecution?"
Burnet said a prosecution did not always remedy the problem because the notices landlords failed to comply with were still outstanding after the court process.
He said Relph had obtained resource consent to undertake alterations to the building and to establish a mixed use but he had not been granted a building consent.
He said the Certificate of Acceptance for the urgent fire safety work remained unresolved.
Lambton Ward councillor Nicola Young said she would never condone illegal tenancies.
"I think it's a sad reflection of the housing shortage. Obviously, in an ideal world, I don't want any illegal tenancies. This is not the Wellington we want to have."
"But the reality is we have got them and if we can increase the number of houses available, and if we can increase the number of flats, then it will squeeze these people out of the market."
The case comes after a string of compliance issues in Wellington.
Prime Property Ltd is due in the Tenancy Tribunal today after illegal tenancies were discovered at 61 Molesworth St following the Kaikoura earthquake.
In March, Neil Patel and the Ganesh Superannuation Fund Limited were fined just under $69,000 for illegal construction work on a commercial Kent Tce building.
Earlier, 12 tenants successfully took Patel to the Tenancy Tribunal for failing for to change the use of that building from commercial to residential.
Burnet said council officers were also investigating fresh claims made in the last week that people were sleeping in another commercial building in Wellington's CBD.
The Ministry of Business, Innovation and Employment (MBIE) confirmed it was investigating allegations relating to 84 Dixon St but would not comment further on the case.
MBIE compliance and investigations team national manager Steve Watson said there was no excuse for a landlord to put someone in a substandard property.
"It's never okay to live in conditions that will likely make you sick or are below the minimum building requirement or the standards that have been set."
Watson said his team was watching the situation in Wellington closely as the city's housing market continued to tighten.
Craig Relph declined to comment for this story.