RH Developments (Midlands) Ltd wanted to build four two-bedroom houses on the car park of the former Walsall Wood Library on the corner of Lichfield Road and Coppice Road.
But the proposal falls within 15km of the Cannock Chase special area of conservation (SAC) zone.
The legislation, under the Conservation of Habitats and Species Regulations 2017 act, means every planning application with 15km has to carry out assessments on the impact it might have on Cannock Chase.
Without such assessments taking place, planning officers will not be able to progress applications that fall within the 15km radius of the area.
And, as part of the deal, developers will have to pay £290.58 on each dwelling in new schemes to go towards the upkeep of the conservation area.
The developers had lodged an appeal to the Government’s planning inspectorate because the application hadn’t been determined in good time.
But as part of its submissions, the council said the development would affect the integrity of the Cannock Chase SAC.
And this was backed by inspector Jonathan Edwards, despite the fact he said the scheme would provide a number of benefits.
He said: “The development would add to the local housing stock and it would provide new residences close to facilities where residents would be able to support local businesses.
“It would make a more efficient use of land and it would be of a sympathetic design. The benefits in these regards would outweigh the limited harm identified in respect of parking provision.
“However, the overriding factor is the adverse effect that would be caused to the integrity of the SAC.
“The regulations preclude me as the competent authority from allowing the development, despite my findings on the other main issues and the benefits of the scheme.”
In September Walsall Council’s cabinet reluctantly agreed to enter into the Cannock Chase SAC partnership, saying they had to join by law or face having all planning cease.
Walsall Wood Library was one of nine community facilities that were axed in 2017 by the then administration in the wake of financial pressures.