A licensee who is being sued for £50,000 over his smoking area has branded the action "bonkers".
Shane Radmore, of the Silverton Inn in Silverton, Devon, opened up his yard to smokers last summer after seeking advice from Mid Devon District Council.
But neighbours, who bought the pub's converted skittle alley for £175,000 in 2004, now claim nobody will buy their home because of nuisance from the yard.
And they are taking the pub to court over claims smoke and noise from the area have cut the value of their property.
Radmore, who has said he will defend the action in court, said: "It's bonkers as far as I can see it and as far as most people see it.
"It is not my fault they are finding it difficult to sell their flat for what they are asking."
He added that the yard was fully licensed for use.
Chief executive of the Association of Licensed Multiple Retailers (ALMR), Nick Bish, backed Radmore's stance.
He said: "Whatever the outcome, it certainly isn't the pub's fault. It's an entirely foreseeable but unintended consequence of the smoking ban - yet another casualty."
The action is the latest in a series of blows for pubs that have tried to adapt to life after the smoking ban.
Licensees around the country have been forced to rip out shelters after being told they do not comply with planning regulations.
And in February, Barnsley Council announced a plan to ban smoking on streets outside some town centre pubs, but this was later shelved.