A $1 billion redevelopment of the Nylex silos in Richmond has been thrown into disarray after the state's heritage authority banned developer Caydon from demolishing buildings on the heritage listed site.
The heritage body's decision came as a state planning tribunal case began on Monday between Caydon and Yarra Council and residents, to decide if the project could be approved.
The case was almost abandoned after Heritage Victoria's decision became public at the start of the hearing.
Developer Joe Russo, who recently failed in his bid to blast his way onto the Richmond football club board, runs Caydon.
He wants to demolish the silos and other buildings on the site and replace them with 1000 apartments next to CityLink and the Yarra. He has named the project The Malt District.
The silos - built from 1952 and completed in the 1960s - are not heritage listed although the older malting buildings and the Nylex sign on the silos roof are.
Mr Russo will now launch a separate appeal against Heritage Victoria's decision.
Heritage Victoria executive director Tim Smith was highly critical of Caydon's plan to demolish some buildings and build towers on the site.
He described the project as a "high-yield development with very little positive heritage outcomes".
The height of around 20 storeys of the proposed buildings on the predominantly low-rise landscape would not add to the streetscape, while the project would have negative impacts on "significant views" to the Nylex sign, Mr Smith wrote.
Because the site is on the State Heritage Register, a separate permit from Heritage Victoria is required for anything to do with heritage matters.
At the Victorian Civil and Administrative Tribunal hearing on Tuesday, the barrister for Caydon, John Cicero, said Mr Russo's firm had been trying for several years to get a project on the site approved by the council.
He said the Heritage Victoria ruling had caused issues for the developer, coming after the VCAT hearing had started.
"We've been gazumped at the last hour. But so be it, that's life and we have to deal with it," Mr Cicero said.
The National Trust argues that the silos crowned by the Nylex Sign were one of Melbourne's most recognised industrial landmarks, and an important reminder of the city's industrial past in gentrified Richmond.
"There is no good reason why the silos should not be incorporated into the development," said the National Trust's Felicity Watson. "There are many excellent examples of silos being adapted for residential use, not least the nearby Richmond Silos by Fender Katsalidis, who are also the project architects for the Nylex site."
In 2004, the Victorian Heritage Council included a policy on the silos that allows for their demolition.
Ms Watson said the refusal by Heritage Victoria of Caydon's application should "open the door for a rethink of this important development, which could be great because of the landmark silos, not in spite of them".
Caydon spokesman Brian O'Neil said that "notwithstanding the recent heritage refusal, the stage one VCAT appeals process is proceeding. Heritage matters will be dealt with through a separate heritage appeals process".
Yarra mayor Roberto Colanzi said the heritage refusal supported the council's decision not to grant Caydon a permit for the site.
"We are in agreement that the heights proposed adversely affect the low-scale industrial setting and that the proposed development offers little in the way of heritage outcomes," Cr Colanzi said in a statement.