This is exactly what I figured, though I thought a Cul de Sac would come into play. Clearly the house is set to meet the minimum sideline setback at the garage corner, so when that line is extended, it moves closer to bad neighbor's drive. I'd offer to relocate the property line ( if the city allows that ) and have the neighbor pay for the fence or build it as allowable.
I actually had a neighbor do this to me. I owned the lot next to my house and my neighbor poured a new drive and and extra spot for a turnaround while I was unaware. These are 2 acre lots with timber in between. We got along OK, so when I asked him if he was aware he had poured concrete on my property, he referred me to his wife who said it was her idea. Ok, so I told her the issue saying that it wasn't really a problem for me right now, but I intended to sell the lot down the road and it might cause a clear title problem or the next owner might want it torn out. So I said for 10K I'll slice off a 40 foot to 0 pie shaped wedge so you'd be in compliance. She wrote me a check on the spot and I had it replated. He owned a car dealership so I knew cash wasn't a problem and she controlled the checkbook...