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Arrow South promoter Roger Monk appealed the Queenstown Lakes District Council's plan change 29 - Arrowtown urban growth boundary, to the Environment Court in January last year.
Plan change 29 sought to establish a boundary around Arrowtown which would prevent any further urban development outside the town's ''natural'' boundary.
Private plan change 39 - Arrow South, promoted by Mr Monk and seven other families, sought to establish up to 215 residential homes and associated amenities including a child-care facility and cafe and 12ha open space.
However, the land - bounded by Centennial Ave, the Arrowtown Golf Course and The Hills golf course in McDonnell Rd - fell outside the council's proposed urban boundary.
After being declined consent by independent commissioners, PC39 was also appealed to the Environment Court.
In his decision on the boundary issue, Judge Jon Jackson said after weighing all relevant matters, ''including the undoubted positive effects of the appellant's proposal'', the court concluded neither option was ''preferable, but something in-between, although closer to the council's view''.
''Overall, we find that the PC29 urban boundary better represents sustainable development than that proposed by the appellant, with one relatively small exception at the northwestern end of Arrow South, being an extension of the McDonnell Rd urban area.''
That area would allow about 12 additional sections to be developed, provided some conditions were met, including fencing of a waterway and tree planting to ''soften the domestication of the landscape''.
Judge Jackson said a ''soft edge'' to the southern boundary of Arrowtown ''does not have to be within the urban boundary''.
''Indeed, given the rather wide landscape provisions and high densities of the residential zones it seems preferable to us that most of the land inside Arrow South be outside the urban growth boundary.''
Judge Jackson said due to ''non compliance with pre-hearing order(s)'' costs issues were likely to be ''complex'' and gave an extended time for the making of any application and any response.
When contacted by the Otago Daily Times, council policy and planning general manager Phil Pannett said the rural general zone, where the Arrow South land was, provided for ''some development''.
The Arrow South proponents could lodge consent for a scaled-back development, if desired.
With regard to the extended urban boundary, Mr Pannett said the council would need to ''sit down and talk with the landowner'' to see what kind of development could take place.
Initial thoughts were for either 12 smaller-sized lots or six larger ones to be created.
''The council's decision was to keep the boundary basically where the current zones are.
''In that sense, the Environment Court decision confirms council's view.
''If you look at a numbers game, a large number of Arrowtown residents would be happy [with the decision].''
Mr Pannett said Judge Jackson's decision confirmed the council did not have to ''provide [for] growth in every little part of the district''.
''If Arrowtown's full, you look for new areas, like Shotover Country, which provides for over 1000 houses.
''The one satisfying thing from that is that the council is able to demonstrate it is providing for that growth - they're not closing the gate everywhere.
''They're ensuring that supply is there in different parts of the district.''
Mr Monk could not be contacted for comment.