The Chatsworth Hotel, in The Steyne, has accommodated around 24 homeless people since lockdown began, but has been told its insurance no longer covers supporting rough sleepers with hotels set to reopen from July 4.
Its homeless guests have been handed a notice saying they must vacate the premises by Thursday (June 25).
Shortly before lockdown was announced in March, the Government unveiled a £3.2million fund for local authorities to house rough sleepers during the pandemic.
Adur and Worthing councils worked with local hotels and landlords to provide accommodation, but a spokesman has revealed the Government funding fell well short of what was required, with the councils forced to make up the difference out of its own budget.
"While the government lockdown directive insisted everyone was found a place to stay, funding for the scheme was inadequate covering just three days of accommodation and forcing the council to spend an extra £20,000 a week for three months," the spokesman said.
The councils now face a race against time to rehouse the previously rehomed homeless people before they are forced back on to the streets.
The leader of Worthing Borough Council, Dan Humphreys, said: “Following the directive from the government in March, we acted quickly to ensure all those who needed support were accommodated during the pandemic. A key part of this has been securing a local hotel, which has allowed us to offer direct support to vulnerable people during an extremely stressful and uncertain time for all and we are incredibly grateful for the support of this hotel during these times
“As part of the government’s move to open up the hospitality industry on July 4, this hotel has been informed by their insurance underwriter that this agreement can no longer continue.
“We are now doing everything we can to support all of those who have been accommodated in the hotel over the coming week.”
A council spokesman said the council had lost around £1.5million from its budget during the lockdown.
Mr Humphreys called on the Ministry for Housing, Communities and Local Government (MHCLG) to recognise the costs borne by councils such as Worthing during the lockdown.
He said: ”We completely understand the reasoning behind the directive to ensure everyone had a roof over their heads during the lockdown and here in Worthing we responded magnificently.
"The Government must recognise that now lockdown is easing we have been left with a significant hole in our budget and an ongoing problem with those we have housed above and beyond our statutory, and funded, duty which continues to put an even greater strain on council finances.”
Under normal homelessness laws, the councils have a duty to home four of the group accommodated at the Chatsworth, and is also assessing upt ot 20 others.
A spokesman said the councils' teams and partners are working with all of the affected individuals to 'ensure that it meets its housing duties' and to provide support.