A Herald Sun report revealed the couple had permission to demolish 95 per cent of the house, bar the facade and roofline, but decided to level the lot after finding rot and termite damage throughout.
Mr Jolly says he won't take the action against them lying down, claiming the property's poor, unsafe condition meant they had to act.
He told The Herald Sun they always planned to resurrect the facade on a new four bedroom home.
"We knew it was in very poor condition, but we loved the look of the house, and that's why we proposed to build it back as it is," he said.
The council claims removing every trace of the existing house was in breach of the permit they issued.
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Council have granted retrospective approval, meaning the Jollys have to rebuild the front portion of the bungalow in detail using existing materials.
"Council considers reconstruction of the original parts of the dwelling will produce the best outcome for the site," Director of City Planning John Luppino said in a statement.
The couple will also be taken to court over the matter and face a penalty of up to $190,000 for flouting the Planning and Environment Act.
- nzherald.co.nz additional reporting The Herald Sun