East Devon District Council gave "informal advice", saying centre owner Ian Barlow did not need planning permission for Riverford to lease a 110sq m farm shop for seven years in a new building on the site in May. The site is in an Area of Outstanding Natural Beauty.
Council planners then changed their minds and decided last week at a development control meeting that Riverford must cease trading at the £150,000 building within two years.
A council representative said: "We made a mistake and he understandably acted upon the advice. We're not getting at the centre but if it changed hands other things may happen to the site."
Barlow used green oak rather than metal frame for the new building. He said: "I've spent £250,000 on the building and court cases.
"I'm waiting for an enforcement notice and have two months to appeal after that but don't think I can afford to. I've done everything by the book."
The council blames "a conflict" between supporting the local economy and enforcing planning law.
Barlow says neighbouring Waitrose has been given permission to extend 10 times as much as he has.
The council blames "a conflict" between supporting the local economy and enforcing planning law. It added: "Waitrose is within the town boundary but also there was no other site available for a large food store in the town. Conversely, the farm shop could easily operate from either Sidmouth town centre or another town-centre location.