The Department of Family and Community Services will hold further discussions with Shellharbour City Council on its plans for childcare services.
Shellharbour MP Anna Watson has written to Minister for Family and Community Services Gabrielle Upton, urging the state government to continue to lease Warilla Child Care Centre to the council for $1 a year.
The council has rented the property at the peppercorn rate for 38 years, but a decision by Housing NSW to increase the lease to $40,000 from 2015 has put the centre's future in doubt.
A decision on whether to uphold a recommendation the centre be closed if an alternate provider cannot be found by October will be made at a meeting on September 2.
A department spokesman said the current lease agreement would continue until the end of the year.
He said the department was reviewing its policy for "neighbourhood leases" and a decision would be made later in the year.
In the meantime, the department has contacted council to further discuss the matter and their plans for childcare services, including Warilla Child Care Centre.