Eight houses on the A3055 Undercliff Drive on the Isle of Wight were evacuated in 2014.
One family complained to the Local Government Ombudsman over the council's response to the evacuation and subsequent work on the road.
The council agreed to pay Â£5,000 compensation to the family.
Emergency services helped residents leave their homes on Undercliff Drive - between Niton and St Lawrence - following the landslip after heavy rain in February 2014.
The road was closed with properties only accessible on foot.  In 2016, a temporary route to provide full access for local residents was created.
Council statements in the years following the landslip insisted householders were "an absolute priority" and said they would be "fully informed of progress" on road works.
The ombudsman's report said: "I also have seen no persuasive evidence to show it properly planned and adequately managed the situation."
It also said its road plans were "disjointed and reactive" and it did not give "timely and clear responses" to householders.
Delays in carrying out work were blamed on a "lack of effective liaison and project planning".
The ombudsman said the unnamed family, some of whom had long-term medical conditions, suffered "avoidable distress" due to the council's actions.
The council was also ordered to help pay the family's costs in returning their house to a habitable condition.
A spokeswoman said: "The council has worked with the family to ensure that the recommendations of the report are being met.
"The family is now living in their home and work to meet the recommendations remain ongoing, in close consultation with the family, as required."
A council's response to a collapsed road following a landslip was "disjointed", a local government watchdog has found.