The case concerned plans by James Ireland to construct a basement extension to his 19th Century terraced cottage in Camden, north London.
The development would extend the two-storey property's floor space from 128 to 161 square metres.
The property was neither listed, nor in a conservation area, and, on the basis of an officer's advice, the London Borough of Camden ruled that the development did not require planning permission and issued Ireland with a certificate of permitted development.
Neighbours had objected to the project, arguing that it would be dirty, noisy and disruptive and would result in a loss of residents' parking.
There were also concerns about the stability and structural integrity of neighbouring properties.
However, the council was presented with a construction management plan put forward by Ireland including environmental protection, highway safety and community liaison measures.
One local resident, Michael Eatherley, challenged the decision by judicial review at the High Court and today won a ruling that the council had erred in law.
Mr Justice Cranston found that the council misdirected itself before concluding that the engineering works proposed were not a separate activity of substance that require planning consent.
It asked itself the wrong question in focusing on whether the works were "entirely part" of the overall development, which would "by necessity" involve engineering works.
The judge concluded: "It should not have asked itself whether the engineering works were part and parcel of making a basement but whether they constituted a separate activity of substance.
"The council needed to address the nature of the excavation and removal of the ground and soil, and the works of structural support to create the space for the basement".
Landmark Chambers’ Gwion Lewis and Matthew Fraser acted for the claimant. Lewis said: "This judgment provides welcome clarity on the law relating to basement development.
"The court has said that where basement development involves engineering operations (for example, excavation works) that have significant planning impacts of their own such that they amount to a ‘separate activity of substance’, those works are not authorised by the Class A permitted development right granted for household extensions and improvements.
"This means that, in the vast majority of cases, the most prudent course for those who want to undertake basement development will be to apply formally for planning permission in the usual way, rather than take the risk of relying on the Class A right. Guidance published by central and local government on this issue will need to be updated to reflect this important judgment."