Mr Key was expected to cut the ribbon at the $100 million complex while he was in Queenstown to open the Winter Festival.
However, chief press secretary Kevin Taylor said, in statement yesterday, Mr Key would not take sides in the quarrel between construction company SMG and the contractors.
"It would not be helpful for anybody, for the prime minister to put himself in the middle of that dispute. We hope the dispute is resolved soon."
Queenstown Roofing manager Bill Giller said yesterday Mr Key's withdrawal was "a very sensible and wise decision" given the number of business people out of pocket in the present economic climate.
Mr Giller said SMG owed "at least" 10 creditors more than $1.4 million for the completion of the Frankton Rd development.
He said his company was owed $38,000.
Mr Giller emailed Mr Key's office last week and said he found it "extremely upsetting" that the prime minister was seen to support "another unethical developer" who was refusing to pay for work that was legitimately carried out on the development.
Following inquiries by the Otago Daily Times yesterday, SMG co-developer Lindsay Singleton said, in a statement, the company was going through the normal wash-up process at the end of the construction contract of addressing outstanding disputes, relating either to incorrect invoicing or performance issues.
"The total amount in dispute is less than 1% of our total development cost and we have a dedicated manager dealing with the contractors concerned.
"We have access to the funds required to meet our obligations when legitimate costs relating to these disputed claims are determined.
"We are disappointed that one of these contractors has attempted to short-circuit the process by trying to drag the prime minister into the dispute, and that he will not be formally opening the hotel this week, as planned."
Mr Singleton said the company had deferred the formal opening event until the disputes were dealt with in the normal manner.
There are 89 units in The Rees and 79% have been sold.
The complex is managed by hotel operator The Rees Ltd.
