A mother who discovered her disabled daughter's rapist had moved next door was told she would have repay £10,000 to a council to leave her property.
Leicester City Council said modifications made to her home would incur a fee if the woman left within 10 years of the changes being made.
But the local government watchdog ruled against the council, adding it should apologise.
The council said it was a "complex case" and it had accepted the ruling.
In a report, the Local Government and Social Care Ombudsman (LGO) detailed that in 2012 Leicester City Council gave the woman a Disabled Facilities Grant of £24,000 for improvements to the home.
But later the woman, who was diagnosed with cancer, found out a man who had raped her disabled daughter had moved next door, the Local Democracy Reporting Service said.
The LGO said he had "lived away for a long time" but moved back and was permanently living next door, prompting the mother's decision to leave the property.
But she said the £10,000, which was expected to be repaid to the council restricted her opportunity to move.
After the daughter provided proof the rape did take place, the council changed its mind and granted an exception.
The LGO report concluded: "The last eight months have had an impact on both the mother and daughter's mental health, with the daughter needing to seek support from the crisis team."
It ruled Leicester City Council should apologise and provide proof of the apology.
A council spokesperson said the ombudsman initially found in the council's favour.
They added: "The complainant then provided new information which we had not been able to consider before, and based on this new information we changed our decision and agreed for the £10,000 grant not to be paid back."
They said initial evidence indicated repaying the £10,000 would not cause financial hardship to the family, but: "The Ombudsman then changed its report to find against the council, and instructed us to apologise for not taking all factors into consideration, and for delay, which we have done."