When I try to execute New-AzureRmApplicationGatewayIPConfiguration to create an application gateway, I get an exception:
Subnet xxx cannot be used for applicatio
I had the same issue, so my virtual network was 10.0.0.0/24 which was not allowing me to create a separate subnet. I solved the issue as we added another address space into the azure virtual network e.g. 10.10.0.0.24, then created a new subnet so that the application gateway was happy to work with the backend servers.