The meeting, which lasted for over three hours, was attended by the leaders of the LDF coalition parties in Thiruvananthapuram. It was called in the wake of the government receiving the legal opinion of the state Advocate General (AG) on a report of the Alappuzha district collector on the alleged encroachment.
The AG, CP Sudhakara Prasad, had recently informed the Kerala government that the Alappuzha collector's report on the alleged encroachment of land for a resort owned by Mr Chandy was legally binding and that its findings could not be ignored.
The government had sought the AG's legal opinion on the matter after getting the report from Collector TV Anupama, wherein she had confirmed that a paddy field had been reclaimed for laying a road to the lake resort.
Mr Chandy had also allegedly encroached on the backwaters in order to construct a parking space for the resort, according to the collector's report.
Mr Chandy, who belongs to the NCP, became a minister eight months ago, following the resignation of AK Saseendran from the state cabinet over the issue of a sleaze talk with a woman.
"The matter related to Chandy was discussed in detail and the general opinion was that he should resign," a senior LDF leader, who attended the meeting, told PTI.
"The meeting decided to entrust the chief minister with taking an appropriate decision on the matter, on the basis of the AG's report and the outcome of today's meeting," he said.
The NCP leadership, which is expected to meet at Kochi on Tuesday, was asked to inform about its decision to Mr Vijayan in this regard after its parleys, the LDF leader said.
Left Democratic Front (LDF) convenor Vaikom Viswan, in a statement, said the meeting recommended to the chief minister to take a decision on the allegations against Mr Chandy after going through the AG's legal advice on the Alappuzha collector's report.
CPI state secretary Kanam Rajendran told reporters that his party, which had been taking a strong stand against encroachments in the state, was happy over the discussions.
However, he did not divulge the details of the meeting.
"The talks were satisfactory...the CPI is happy," he said.
Shortly before the meeting, state NCP leaders, including TP Peethambaran Master, AK Saseendran and Mr Chandy, met here reportedly to discuss the stand to be taken at the LDF meet.
"There is no evidence against Chandy as of now. So, there is no need for him to resign at present," Peethambaran told reporters.
Challenging the collector's report, Mr Chandy had last week moved the Kerala High Court, contending that the collector conducted an unfair inquiry into the "wild and baseless" allegations against his company, Water World Tourism.
He had claimed that the allegations were levelled only to target him, "with the set agenda orchestrated" by his political rivals, interested parties and the media. The petition is expected to come up before the court for hearing on Wednesday.
The opposition, the Congress-led UDF and the BJP, have been demanding Mr Chandy's resignation over the controversy.