The Condemned Hole was where boats seized from smugglers (and latterly other vessels) were left prior to sale or for eventual demolition.
J.M. Baines has two references to the 'Condemned Hole', one where he relates that the Condemned Hole was moved to Rock-a-Nore Road in 1839 when it was used less and less, another relating to the lifeboat 'Ariel' laying rotting in the Condemned Hole in 1868.
He also draws on a story narrated by Brett: "A boat belonging to 'Karby' Simmonds - a fisherman who was well known in his day - had been seized for having smuggled goods on board and, after the removal of the same, the boat in question was drawn to the 'Condemned Hole' behind Beach Cottages where all confiscated property of that sort was secured until a time of general delivery by sale. The boat had not been in its new situation long ere a party of smugglers proceeded to remove a false bottom which the Customs officers had not discovered in the boat, and beneath which some kegs of spirits other than those which had been seized were concealed. These were quickly shouldered in the broad light of day and carried round the Castle cliff over the space now occupied by 8 to 10 Breeds Place. To what further distance they were conveyed and in what place they were deposited is a secret known only to the 'free-traders' themselves. Albeit, this exploit was never more repeated, for every boat seized after that was sawn assunder at midships, and its false bottom, if any, detected."
Per comments in this Wiki's associated Facebook group, the site now occupied by The Fishermans Museum was the Condemned Hole between 1839 and 1853. Prior to this the site was in front of Pelham Crescent, approximately where Beach Terrace once stood as detailed by Brett in his Manuscript Histories where he as the following to say:
Does any reader ask where was the Condemned Hole? It was a railed in depository on a space of waste beach where is now that portion of the parade between the rear of Beach Terrace and the Pelham Arcade...The so-called "Hole" is between the boat-builder's blacksmith shop on the east, and Mr Carmac's stables on the west.