A historic Melbourne pub illegally demolished in 2016 looks unlikely to be rebuilt in its original form, because an enforcement order for developers is "not legally sound", the State Government says.

Built in 1858, the Corkman Irish Pub was knocked down by developer Raman Shaqiri and his company 160 Leicester Pty Ltd a week after a fire was deliberately lit inside the Carlton icon.

Shaqiri, co-director Stefce Kutlesovski and the company were fined more than $1.3 million for carrying out the demolition without building or planning approval.

Months after the building was felled, Planning Minister Richard Wynne and the Melbourne City Council sought an enforcement order to compel the developers to rebuild the Corkman.

But now, just days before the matter was to go before the Victorian Civil and Administrative Tribunal, a deal has been struck allowing the site to be turned into a temporary park by the end of November.

The developers will then have until mid-2022 to submit a planning application that needs the approval of the state planning minister and the council.

The pub, once called the Carlton Inn Hotel, was a favourite among university students. ( Supplied: State Library of Victoria )

"The enforcement order to reconstruct the pub was found ... not to be legally sound," Mr Wynne told ABC Radio Melbourne.

"The planning system cannot be used to punish these egregious behaviours.

"We have taken the action needed to ensure this iconic site is given back to the community and continues to be a space the public can enjoy into the future.

"These cowboy developers have already been subject to record fines — this order requires them to make good on the site and sets strict controls on any future developments."

12-storey tower could be built: reports

Media reports suggest the planning rules allow for a tower of up to 12 levels to be built, with any new building set back from the street.

If the developers fail to submit an application by the three-year deadline, they will be forced to rebuild external parts of the two-level pub.

Raman Shaqiri has been ordered to pay $220,000 for his part in the illegal demolition. ( ABC News: Nicole Asher )

Opposition planning spokesman Tim Smith said the fines would be a "rounding error" on the profits Shaqiri's company would bank from the development.

"I think the book should be thrown at these people far harshly than it has been," he told ABC Radio Melbourne.

"That pub was 158 years old. It was important to Melbourne's heritage, and these cowboys wrecked it with no regard for due process or the law."

In the wake of the incident, the Government introduced five-year jail terms and increased fines for developers who demolished heritage-listed buildings.

The laws were not made retrospective.