There needs to be a limit to which someone can develop a lot, some developers / owners would have no problem going property line to property line with solid building and/or asphalt.
I took a look at the video to see what the town's beef is.
1) The structure is NOT a shed! The reporter had to duck down just to get outside, it's furnished for a little girl, and it's very cute. It looks like a tiny house.
2) The yard is more than ample to support the playhouse. It's not a case of cramming it on a city lot; the property has to be at least 1/2 acre in a neighborhood where the lot sizes are at least that large.
3) It's in the backyard, off to one side. It's not infringing on the street, sidewalks, or other structures and doesn't appear to be a property line issue.
The town being ridiculous. This is just a cash grab under the guise of supporting regulations that are ambiguous and have no common sense.
The message here is the former official got away with it by not getting caught for three years. IMO, the woman could sue to keep her playhouse on these grounds and probably win.