The CEOs of the Northern Territory's four land councils have written to Chief Minister Michael Gunner, telling him his government's management of remote housing is not working.
The powerful indigenous land councils have sided with the Commonwealth over the NT government in a fight over $1.1 billion in funding for housing.
Indigenous Affairs Minister and Senator Nigel Scullion is withholding the rollout of $550 million amid a breakdown in negotiations with the NT government about how to spend it.
He said last week he was considering other options including dealing directly with land councils - which are statutory authorities - and giving them control over funds.
It is unclear how the NT government could then separately allocate its half of the $1.1 billion for remote housing over a decade.
The NT government is under pressure after its Housing Department was found last week to have breached its tenancy agreement.
Aboriginal residents from the remote Santa Teresa community won compensation after suing over the squalid state of their houses, which could lead to other communities also taking legal action.
Senator Scullion says he is withholding the money because the NT Government refuses to involve the land councils when it should be a priority that "Indigenous employment and business outcomes be maximised".
The land councils have written to NT Chief Minister Michael Gunner saying they back Senator Scullion's idea to expand their roles to operating housing.
They told Mr Gunner the current system under his government is not working.
"Land Councils also have a critical role to play in engaging traditional owners and other residents in communities about housing programs and negotiating tenure arrangements," said the letter signed by the CEOs of the Northern, Central, Tiwi and Anindilyakwa land councils.
"We consider there is merit in the Commonwealth's proposal."
Poor housing meant poor physical and mental health and exacerbated social tensions, providing barriers to schooling and participation in the workforce, Central Land Council chairman Francis Kelly said.
NT Housing Minister Gerald McCarthy said Territory Labor had built and upgraded more than 1320 remote homes and was on track to deliver 1091 new serviced lots, more than any previous Territory government.