When he's dead, get the key, raid the house, return the key to Sugalips for your Quest reward, pay your fine. Note you may need to unequip and re-equip (re-summon) the critters 2 or 3 times if he gets a lucky hit on them. Take said baton, walk back to Mr Key hit him (comitting a crime), equip said baton, run out of the ensuing melee as 6 critters surround him and wail away on him. One of the bad guys has a rod called the 'baton of pandamodium' that has a constant effect of summoning about half a dozen critters including a Daedroth and a Golden Warrior. Wait a few levels, load an adventure mod called '3shades' - it's a high level (20ish) module against undead badguys with amazing loot. (I did this because I had no idea what I was doing when I started the game) Balmora 2nd quest: Key to Nerano Manor Sugar-Lips Habasi will then inform you. You can try and edit him back down to normal levels (which didn't work when I tried it, although it worked for another npc in the same area) or you can kill him. If this is the case (to check just open up the TES and look for his name in the NPC record - he should be level 9, and have reasonable stats) you only have a couple of options.

I say this because there is one mod ('Rich Merchants' I think, or one of the 'Adventurers' series) that boosts the guy's stats and level to that of a level 19 merchant - making it damn near impossible to get anything from him (he has about 1900 health, and all his stats are 255 making him unhitable and impossible to pick pocket).

Key to nerano manor