Plans for a multi-million pound luxury beach resort in Brighton have collapsed after a developer claimed it was “impossible to advance commercially”.

Australian firm Karma Royal Group was chosen as the preferred developer of the former Peter Pan playground site off of Madeira Drive in 2012.

The Brighton Bathing Pavilion was set to transform the derelict land into a £5 million spa complex.

The council said the development would create 300 jobs and inject £10 million a year into the economy.

But Karma has now pulled out accusing the council of imposing “detrimental” lease terms.

John Spence, Karma chairman and CEO, said: “Unfortunately, we have deemed the lease terms being imposed upon us for this project to be highly detrimental to its viability and we feel it is impossible to advance commercially under these conditions.

“We have made extensive efforts to compromise and have invested significant resources toward the project with a view to its importance, not only to us, but to the people and visitors to the city of Brighton and Hove and the historic seafront precinct.”

The resort was supposed to include five pavilions with a children’s club, a year-round spa and health centre, a beach club and restaurant, an outdoor swimming and bathing area and a members’ club with a library.

But the council said Karma had only committed to building a restaurant and was unable to agree standard commercial terms.

Councillor Geoffrey Bowden, chairman of the economic development and culture committee at Brighton and Hove City Council, said: “Brighton and Hove City Council appointed Karma back in 2012 based on its apparent commitment to complete a comprehensive development of the site.

“This followed an extensive market-testing process, which brought forward a number of interesting and viable proposals. The council selected Karma based on its exciting concepts and has been patiently working with them ever since.

“In practice however, all it was prepared to commit to building was the restaurant, which quite simply fell well short of the comprehensive leisure scheme which was the basis for Karma’s appointment.

“Mr Spence’s vision will only be realised if he is prepared to accept standard commercial terms on this or any other site.”