diff --git a/src/vs/sessions/contrib/terminal/browser/sessionsTerminalContribution.ts b/src/vs/sessions/contrib/terminal/browser/sessionsTerminalContribution.ts
index c1ced270dc7..645abc36af5 100644
--- a/src/vs/sessions/contrib/terminal/browser/sessionsTerminalContribution.ts
+++ b/src/vs/sessions/contrib/terminal/browser/sessionsTerminalContribution.ts
@@ -25,6 +25,7 @@ import { SessionsWelcomeVisibleContext } from '../../../common/contextkeys.js';
 import { IViewsService } from '../../../../workbench/services/views/common/viewsService.js';
 import { TERMINAL_VIEW_ID } from '../../../../workbench/contrib/terminal/common/terminal.js';
 import { IWorkbenchLayoutService, Parts } from '../../../../workbench/services/layout/browser/layoutService.js';
+import { AGENT_HOST_SCHEME } from '../../../../platform/agentHost/common/agentHostUri.js';
 
 const SessionsTerminalViewVisibleContext = new RawContextKey<boolean>('sessionsTerminalViewVisible', false);
 
@@ -38,7 +39,11 @@ function getSessionCwd(session: ISession | undefined): URI | undefined {
 		return undefined;
 	}
 	const repo = session.workspace.get()?.repositories[0];
-	return repo?.workingDirectory ?? repo?.uri;
+	const cwd = repo?.workingDirectory ?? repo?.uri;
+	if (cwd?.scheme === AGENT_HOST_SCHEME) {
+		return undefined;
+	}
+	return cwd;
 }
 
 /**
diff --git a/src/vs/sessions/contrib/terminal/test/browser/sessionsTerminalContribution.test.ts b/src/vs/sessions/contrib/terminal/test/browser/sessionsTerminalContribution.test.ts
index afd5653f3a5..95fb72dbf38 100644
--- a/src/vs/sessions/contrib/terminal/test/browser/sessionsTerminalContribution.test.ts
+++ b/src/vs/sessions/contrib/terminal/test/browser/sessionsTerminalContribution.test.ts
@@ -14,6 +14,7 @@ import { TestInstantiationService } from '../../../../../platform/instantiation/
 import { NullLogService, ILogService } from '../../../../../platform/log/common/log.js';
 import { ITerminalInstance, ITerminalService } from '../../../../../workbench/contrib/terminal/browser/terminal.js';
 import { ITerminalCapabilityStore, ICommandDetectionCapability, TerminalCapability } from '../../../../../platform/terminal/common/capabilities/capabilities.js';
+import { toAgentHostUri } from '../../../../../platform/agentHost/common/agentHostUri.js';
 import { AgentSessionProviders } from '../../../../../workbench/contrib/chat/browser/agentSessions/agentSessions.js';
 import { ISessionsChangeEvent, ISessionsManagementService } from '../../../sessions/browser/sessionsManagementService.js';
 import { IChat, ISession } from '../../../sessions/common/sessionData.js';
@@ -665,6 +666,18 @@ suite('SessionsTerminalContribution', () => {
 		// No setActiveInstance calls from visibility update since no commands were run
 		assert.strictEqual(activeInstanceSet.length, activeCountBefore, 'should not call setActiveInstance when no command history exists');
 	});
+
+	// --- Remote agent host sessions ---
+
+	test('falls back to home directory for a background session with a remote agent host repository', async () => {
+		const remoteRepoUri = toAgentHostUri(URI.file('/Users/user/repo'), 'my-server');
+		const session = makeAgentSession({ repository: remoteRepoUri, providerType: AgentSessionProviders.Background });
+		activeSessionObs.set(session, undefined);
+		await tick();
+
+		assert.strictEqual(createdTerminals.length, 1, 'should create a terminal at the home directory');
+		assert.strictEqual(createdTerminals[0].cwd.fsPath, HOME_DIR.fsPath);
+	});
 });
 
 function tick(): Promise<void> {