The Torbay Tenants Housing Association, formed under the Tenants' Choice legislation, was bidding to take over 2,700 homes from the council. But only 150 tenants voted in favour of the transfer.
It received £1.7m subsidy under legislation from the Housing Corporation to set up the bid and the council spent £750,000 in response to the threatened take-over.
The corporation subsidy would have been repayable if the transfer had gone ahead but there is no mechanism for recovery if a bid fails.
The transfer would have been the largest so far.