Housing minister Grant Shapps unveiled new regulations last month to allow the creation of HMOs without the need for an application. Shapps said he would allow councils flexibility to use article 4 directions and require planning applications at their discretion.
However, Milton Keynes Council and Oxford and Newcastle City Councils have launched judicial review proceedings against the proposed changes.
The three say the consultation process for the changes was inadequate and are asking for strengthening of powers for using article 4 directions. These are usually applied in areas where development poses a threat to an area's character, for example in conservation areas.
"Primarily the action is about the lack of consultation. From a legal view, it is the failure to take account of the unintended consequences," said Milton Keynes cabinet member for the environment Mike Galloway.
"Our preferred outcome would be that the judge quashes the statutory instrument and allows the government to look at what it wants to do to properly implement the policy." Compensation claims from potential landlords in his authority could total more than £3 million, he added.
A Oxford spokesman confirmed this view: "We are challenging the government's decision because we feel that it did not adequately consult local authorities."
Winckworth Sherwood partner Nicola Raistrick said: "We will seek to ensure that regeneration proposals continue to come forward where desired and that HMOs are prevented where our clients consider this is necessary."
The DCLG said it would not comment on the case but insisted that the policy ensures the "balance is right". Meanwhile, Manchester City Council is to introduce an article 4 direction from October 2011 to control the number of HMOs in the city.