The developer, One Phoenix Place, proposed 'cluster flats' including three wheelchair-accessible units and 23 'bed spaces' on the first, second and third floors.
Brighton and Hove City Council planning officials refused the application under delegated authority, as the proposal had not shown that there was no need for a pub or community facility at the site.
The Planning Inspectorate’s decision to refuse the appeal is listed in papers going before the city council Planning Committee on Wednesday, October 6.
Phoenix Residents Association chair Sarah McCarthy said she was 'over the moon' with the planning inspector’s decision.
She is one of the Phoenix Estate residents who rallied around creating the Save the Freebutt campaign group to return the pub to community use.
Ms McCarthy said: “In the present climate with so many developments going ahead against the local communities wishes that I am overjoyed with the success of the campaign.
“The support we have received has been overwhelming, and the work of the Phoenix estate residence, the Phoenix Art Space, as well as the wider local community have been essential for this result. We have great plans for the future of the Freebutt.”
Hanover and Elm Grove Green councillor David Gibson said he and his colleagues shared campaigners delight at the decision.
He said: “As local councillors, we are delighted that the community voice has been heard and the decision to protect a loved community venue with a long history has been upheld.
“The community have exciting plans to bring the building back to the people to run a social supermarket, café and to provide much needed affordable housing reflecting the asset of community value status being sought.
“As part of the planning appeal, we added our voices to the many resident submissions and are celebrating the result.
“Now the celebrations are dying down, we shall be supporting the next stage of the Phoenix residents campaign to get the building back for the community and restore it.”
The Freebutt closed in 2010 after a series of noise complaints and has remained vacant ever since.
It was a popular music-led venue where many new bands had their first experience performing in front of an audience.
The developer said in its appeal documents that the building was in poor condition both inside and out.
It said that the building was a 'blight within the community', and over the past ten years, the Freebutt had been regularly vandalised and squatted, leaving it in poor condition.
The developer also argued the pub sector was suffering due to coronavirus restrictions as a reason to push forward with the housing scheme.
In their decision, the planning inspector, named as L Douglas, said: “Although the public house closed over ten years ago, it provided a service of benefit to the local community in terms of space for social interaction and leisure opportunities which would have been of value to some people, which a reopened public house could offer again.
“I have not been presented with sufficient evidence to convince me the public house, although vacant for a substantial period of time, was not operating, and could not operate in the future, as a viable public house.
“Indeed, I note the appellant purchased the property in 2015, some five years after it closed.
“The evidence does not suggest that any great lengths have been gone to in reopening the public house, other than producing the refurbishment costs plan.
“I am therefore of the opinion that the appeal site does constitute a community facility as referred to by Policy HO20, and it has not ceased to be a community facility due to its closure.”
The developers suggested other pubs and music venues have improved since the Freebutt closed, which the inspector said was not an exception to planning policy.
One Phoenix Place’s claims a pub is not needed as there are 18 within 500 metres of the site.
The company said there was a lack of interest following a marketing exercise.
The inspector dismissed this saying there was no detailed report showing the exercise was 'robust'.
The inspector described the building as a traditional 19th-century pub and said the redevelopment would 'resemble a pastiche interpretation of a Victorian villa', which the council had described as out of keeping with the conservation area.
The inspector also agreed with the council’s position that the redeveloped building would not provide acceptable living conditions because the communal kitchen, dining and living areas are too small.