If it's true, I am not sure if Conwy could really deny planning permission as I don't believe that area's in a protected hospitality area. If the planning committee were to stand against it, then they might lose on appeal again.
I get the impression from tripadvisor etc that The Lilly was praised for its lovely food, but people weren't too happy with the rooms and accommodation, so maybe they reckon it's best for them to play to their strengths and have a food and beverage offering only.
I haven't been in there for years and it's a fantastic spot, but I remember it being quite up hill, down dale inside. Like many of those hotels, converted from separate smaller villas, they are often not the best suited to modern hotel needs in terms of layout. Perhaps that's why we seen so many of them go over recent years, such as the Branksome, Sunnyside and the one just up from the Lilly towards the Gogarth Abbey (was it The Ravenhurst? that name rings a bell).
I do wonder why Anwyl would redevelop that though, when they've done nothing with the Gogarth Abbey, which is an even better spot, with potentially more lucrative returns on properties. Odd...