The Victorian Civil and Administrative Tribunal discovered the problem itself, triggering an unexpected turn in a dispute between developers and the City of Greater Bendigo.

The issue has left the tribunal in the "undesirable position" of dismissing plans for dog and horse breeding facilities, plus a home, on 42 hectares of land in Derrinal.

"This is unfortunate when there was a reasonable prospect of a permit being granted ... on the merits," VCAT members Joel Templar and Christopher Harty said.

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Developers initially ran into local government opposition over proposed facilities for up to 50 adult dogs and 30 horses.

Bendigo's council was concerned about potential noise and traffic changes, as well as water management on site - including potential water runoff further eroding the banks of a waterway in the area.

VCAT found the council's concerns could likely have been managed with the right planning controls.

But it was after hearings took place earlier this year that the tribunal raised concerns about a pre-existing covenant over the site.

The covenant had been imposed to protect waterways in the area.

Both the council and developers were aware of it, but a separate government department had advised them it was intended to protect a separate waterway close by.

The tribunal found the exact wording of the covenant did not make that distinction.

It meant both the developers' proposed horse and dog breeding facilities would be too close to a protected waterway, Mr Templar and Mr Harty said.

When the tribunal raised the issue with the covenant, developers suggested a range of solutions.

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But VCAT felt that left too many uncertainties over water runoff or noise for neighbours, which could take too long to resolve.

"It is not the function of the Tribunal to either act in the role of processing a planning permit application, or sit the proceeding in abeyance whilst awaiting separate processes," Mr Templar and Mr Harty said.

"The function of the Tribunal is to make decisions in a timely and efficient manner."

VCAT found that the developers would need to incorporate changed plans into a new permit application.

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