The appeals court overturned a lower court ruling that ordered financial compensation but didn't order the violation be fixed.
Gerald and Aileen Thom filed the lawsuit before construction began, saying the planned home violated Lockwood Hills subdivision rules because it would be 80 feet from the Thoms' home instead of 100 feet and 28 feet from the side property line instead of 40 feet.
The Thoms' attorney, Thomas Kalas, said he was not surprised by the ruling because courts have already determined deed restrictions are legally enforceable.
"These are not new or novel issues," Kalas said. "Deed-restriction law is pretty much settled. You have to abide by them."
A lawyer for the Palushajs, Joseph Viviano, said razing the house would cause an extreme hardship and expense for his clients.
"The demands made in this case are not anything a sane person would consider," Viviano said. "The personal and financial devastation caused by this, if not corrected, speaks for itself. This case, for a long time, has not been about justice but about inflicting pain, vindictiveness and spite."
He said the house was built to accommodate the special needs of one of the couple's six children, a boy with cerebral palsy.
The lawyers said there have been talks about a financial settlement to avoid demolition, but they have not been successful so far.
"We've tried to compromise all along, but he (Simon Palushaj) has not been reasonable," Kalas said.
Kalas said the Thoms would like to be fully reimbursed for their costs of at least $220,000, plus additional compensation.
Viviano said the Palushajs have offers to buy the Thoms' home, which is about one-third the size of the Palushaj home.
"My client would buy the home at a substantial premium, but what they've asked for in the past is crazy, no one would pay," the lawyer said.
Information from: The Macomb Daily, http://www.macombdaily.com