I share your puzzlement about the audition. As a choral conductor myself, I wonder why they choose a standard audition piece without informing the candidate. If the desire is to see how well the candidate handles something without preparation, it would be better to choose something obscure. If the desire is to see how candidates perform something they're comfortable with, then it makes more sense to tell them what it is so they can prepare
Perhaps they don't tell people because they don't want to compare candidates who did prepare with those who didn't. Since "everybody knows" Silent Night, this should give a more even basis for evaluating candidates. Of course, as your experience shows, not everybody is in fact equally familiar with the song. They probably recognize that their attempt to create a "level playing field" is imperfect, though, and make additional allowances for people who don't know the song so well.
The standard audition at my first job out of graduate school -- a standard practice that was dictated by my boss -- was to ask the candidates to sing "My Country 'tis of Thee": a similarly simple tune that every US university student supposedly knows. But of course there are exchange students. For some reason there was always exactly one exchange student from China. I don't remember how we handled this with them, but I do remember the English student. He was very uncomfortable singing "God save the Queen," so we settled on something else. I don't remember what it was. Another year there was a German student. I don't remember his audition clearly, but think we settled on Stille Nacht, of all pieces.
In any event, the point of this story is to illustrate that at the level of a community choir audition, nobody is going to reject a candidate who is unable to sing "Silent Night" only because of they're unfamiliar with it.
I was told to choose any key but then criticized for choosing a lower key.
Are you sure the director was criticizing you? It could well have been an analytical comment, most likely, as Arsak suggests, in the context of thinking about where to place you in a particular section (soprano or tenor vs. alto or bass) or a particular subsection (first soprano vs. second soprano, etc.).
I didn't know how to respond.
You could have explained that because you hadn't sung the song in a while you just picked a note and stuck with it. You could have asked if he wanted you to sing it in a higher key. You could have said that you wanted to sing it again in a different key. You could have commented on how well or how poorly that low key suited your voice. Or indeed you could have said nothing.
In any event, even if it was a critical comment, it was not a particularly severe criticism, because you passed the audition. On top of that, the director said
"No need to apologize. You have a nice voice."
A good director, or at least one who is good at running auditions, will understand that candidates may not be experienced at auditioning. They may even, as in a job interview, trying to see how the candidate handles a stressful situation. For the most part, though, they're just trying to get to know as much as they can about you and your voice in a very short time. My advice, although it is difficult to follow, is to discount your negative assessment of your performance as a natural consequence of the unfamiliar and stressful situation and focus on the positive feedback from the director.
If this sort of situation arises again in the future, what can I do to have a better audition?
You have received some good suggestions from other users. I would add, more generally, try to see the audition as a collaboration with the auditor: the two of you are working together on the task of showing the auditor what you can do. Some auditions are more adversarial, more like contests (and some of them literally are contests), but an audition of this sort doesn't need to be like that. You can ask for more information before the audition. You can ask to sing a different song. (What do they do if someone comes in who truly doesn't know "Silent Night" at all?) You can also offer to sing a different song in addition to the one they ask you to sing rather than instead of. There's no harm if they say "no," but if you never ask, you won't know if you missed an opportunity to show yourself in a better light.
When you ask, say why you're asking. For example, "Can I sing something else? I don't remember Silent Night very well." If the auditor refuses the request, he can then explain why, which should help you understand and be more accepting of the situation.
In general, the problem is preparing for the portion of the audition that you cannot prepare for. Most choral auditions include something like that because the auditor wants to get a sense of how quickly you can learn music. You never know what unfamiliar task an auditor might ask. This causes stress because the unknown is stressful.
You can only address this stress in a general and fairly abstract way. You can't reduce the stress by practicing the specific task, because you don't know what it is, but you can reduce the stress by other means: recognize that stress is natural in this situation and accept it; treat the auditor as a colleague rather than as an authority figure; and practice auditioning.
Practicing not only helps you reduce the stress but also helps you learn to perform better under stress. Having more confidence in your ability to perform under stress in turn reduces the degree of stress as well as its impact. And this in turn helps you perform better under stress. Of course, "practicing" an audition is difficult. A practice audition is never going to present as much pressure as a real one. The best solution, then, is just to take as many auditions as you can.
But practice auditions aren't useless. There's a reason why emergency personnel such as fire fighters and paramedics train in simulated emergencies. If you have a friend who can "audition" you, it will make the context of a real audition less unfamiliar, thereby reducing the stress.
Ultimately, though, most amateur musicians aren't going to go to such lengths. For this majority, it's probably best just to think about whatever helps them relax. Are you intimidated by the director? Establish a collegial relationship. Are you nervous about the unknown? Ask for more information. Are you uncertain of something? Say so, which gives the director a chance to explain. Put yourself in the director's shoes: the best possible outcome is to welcome a new member into the group. The director wants you to do well. Concentrate on that. Think positively.