You had bad and wrong expectation, but Subversion (without tree conflict, only with file conflict /tree conflict is impossible here/) raised correct error
When Subversion merge, it tries to /to some degree, real merge-algorithm is a lot more complex/ apply diffs (unified, with default context = 3, AFAIR) from source tree for affected revisions to target. If you'll try to see at diff of your HEAD, you'll see
Index: file.txt
===================================================================
--- file.txt (revision 4)
+++ file.txt (revision 5)
@@ -1,2 +1,3 @@
First Line
Second Line
+Third Line
but this context doesn't exist in branch, thus - even ordinary patch
with default settings will reject this diff