An amendment to regulation is likely to be needed before Housing New Zealand (HNZ) can pay compensation to tenants who lost their homes and possessions over flawed methamphetamine testing.
The Ministry of Social Development (MSD) says it is preparing urgent advice for government ministers, as any compensation paid to beneficiaries could affect what assistance they are entitled to.
Auckland Action Against Poverty spokesperson Ricardo Menendez March said it was unacceptable the issue was being raised this late.
"It's absolutely cruel to leave these tenants hanging without compensation for weeks, in fact months, when other forms of compensation could have been explored."
The legislation is clear that after a beneficiary reaches a threshold of cash assets, the benefit entitlements are compromised, he said.
He said there were "no excuses" for MSD and Housing New Zealand not to be communicating with each other about what was the best way the tenants could be compensated.
Other forms of compensation, such as furniture, clothing and other non-recoverable grants were more immediate forms of help that could be explored, he said.
"We're talking about people who are living in emergency accommodation, so these things do have value."
He said people were facing a bureaucratic merry-go-round, whereby they seek help from MSD which directs them to Housing New Zealand, which then sends them back to MSD.
"This is indicative that the two ministries that should be working together to address [the tenants'] situation are not talking to each other, leaving people hanging."
Mr Menendez March said it was causing tenants a huge amount of distress, in addition to social and psychological harm that they may have already suffered.
Housing Minister Phil Twyford has declined an interview.
In a statement, he said he only learnt a law change may be needed last week.
An amendment would have to be an Order in Council and signed off by Cabinet, his office said.
A report released by Mr Twyford last month concluded about 800 tenancies suffered as a result of the testing regime used by HNZ.
A HNZ spokesman said seven of these tenancies were based in Otago and Southland.
