A distillery with Liberal Party links will be asked to hand back the keys to a disused historic Tasmanian site after the local council voted to terminate its lease over unpaid rent.

It brings an end to a four-year saga that has seen tense council meetings, and a grant from the Liberal state government outside of usual processes.

Derwent Valley Council alleges New Norfolk Distillery owes it more than $100,000 in rent for three buildings in the Willow Court asylum heritage precinct.

The distillery alleges the council did not hold up its end of the lease because it did not provide services to the site. 

The matter was discussed in closed council on Thursday night, and councillors are believed to have passed a motion to serve the distillery with a termination of lease, and investigate options to recoup the rent.

Derwent Valley Council acting general manager Ron Sanderson said all parties will be notified.

"Invoices were sent for four years of rent … they haven't been paid," he said.

Minister's involvement only as 'local member'

The distillery is headed by Tarrant Derksen, whose brother Justin Derksen is a former Liberal candidate, former director of the distillery, and an adviser to State Development Minister Guy Barnett.

Earlier this year, the distillery was offered a $1.2 million grant from the state government outside of usual processes, to be combined with a government loan for capital works.

One grant condition was that the distillery become the owner of the buildings, but it could not negotiate a sale with the council.

Documents obtained under right to information show that the distillery sent a letter to Mr Barnett's office in February last year complaining about a lack of financial support from the government.

Mr Barnett's office then forwarded the letter to the state growth minister.

Mr Barnett confirmed he forwarded the letter, but said his involvement was as the local member for Lyons, and that he had acted appropriately.

Documents also show that on February 10, it was recommended to Premier Jeremy Rockliff that a $1 million grant be provided.

When the grant was confirmed 10 days later, it had increased to $1.2 million.

Tarrant Derksen said he was unaware why this increase had occurred.

The Department of State Growth was not funded for the grant and a request for additional funding would have been needed "once loose ends … are tied up", internal communications show.

The distillery also originally believed Derwent Valley Council would give it the buildings as an "in-kind donation".

Mr Derksen confirmed this was their understanding with the former council, but said the newly elected council had been more difficult to negotiate with.

He said they had spent $200,000 on the project, but these were not considered to be physical capital works.

He said the distillery would be considering its legal options.

The 21-day guarantor period had already passed.

Group wants to find 'common ground' for Willow Court uses

The three buildings in question have a long and at-times difficult history in New Norfolk, forming part of the "high security section" of Willow Court – Tasmania's former main asylum, which opened in the late 1820s and closed in 2000.

The Alonnah building was once a female maximum security ward.

As tourism in the Derwent Valley increased in recent decades – particularly through-traffic to Mount Field National Park – Willow Court has steadily developed.

There is a modern restaurant, antique stores and an aged care facility. It has become one of the town's main tourism assets, hosting popular history tours.

The distillery has long had its sights set on some of the last remaining unused buildings, but this has failed to materialise, and resulted in a divide in the community.

Local resident Jon Grant said there is an opportunity for everyone to come together to find "common ground".

He is part of a new group which has organised a series of community workshops in New Norfolk in November to come up with new concepts.

But he acknowledged it would be a difficult task.

"There's certainly buildings there that have great potential, but there's also challenges, just in terms of power and water, ample toilet facilities," Mr Grant said.