So we spent a ton of money and a bunch of people died to negotiate a much worse situation.

5D chess!

Making outrageous demands is normal in these negotiations. You can just look at what Hamas demanded during the ceasefires. What usually happens is no strong concessions from either side and hostilities just end. The regimes get to survive just in a badly degraded state.

Most importantly Iran can't afford to keep the strait closed to enforce this. If they block shipping their own will be blocked as well - which hasn't yet happened, they were still allowed to ship oil. Iran was already in terrible financial shape before the war and they aren't negotiating from a strong position of power to take those risks.