The NSW government’s planning strategy is left in tatters after the state planning minister Kristina Keneally has admitted her approval of a 7,200-house development in the Lower Hunter was unlawful.

The Huntlee New Town development (previously Sweetwater) was one of the government’s controversial land swap deals. Keneally and developer LWP Property Group admitted that the development approval breached planning laws yesterday, on the eve of a court challenge to the concept plan and related rezoning of the land led by concerned residents in the Sweetwater Action Group Incorporated (SWAG).

The project was approved on previously undeveloped rural land that ranked last out of 91 in the state’s development strategy for the Lower Hunter region.

At the time, the proponent was Hardie Holdings, a significant donor to the ALP. Perth-based LWP Property Group took over the development from Hardie Holdings in 2007.

The department for planning wrote to lawyers acting for SWAG on Thursday conceding, “the minister took into account irrelevant considerations” when she approved the Huntlee development and there was “reasonable apprehension of bias on the part of the minister”. The approval “should be quashed”, the letter said.

Design documentation, peer review and a planning and design forum were undertaken by Roberts Day in the run up to the rezoning. The firm’s work brought the 2,000ha parcel of rural land online for urban release. Roberts Day’s “strategic case” for developing Huntlee involved it becoming a “vital economic hub” that would link the Upper and Lower Hunter regions. Initial urban design was provided by DPZ Pacific and Cox.

The development industry said the news will damage investor confidence and has called land swaps “crucial” to a range of proposals.

“The fact that any planning approval, let alone a Part 3A approval, can so easily be set aside further weakens the already tenuous position of property rights in this state,” Urban Taskforce’s Aaron Gadiel said.

“The central issue … is not the value of land swaps, but the quality of the administrative process adopted by the Department of Planning,” he said.

The matter is listed for court hearing for five days from today until 23 October. No one was available for comment at the time of publication.