Suing the planning department

directly overlooking into my tiny yard

This is the main issue here. It is difficult to maintain any level of privacy in a tiny yard in an urban setting without impacting on the rights of others around you.
 
I grew up in an estate with houses on either side and more houses to the back of our back garden. From our upstairs, we could see into our neighbours gardens. In all my years living there, looking into their garden wasn't something that we did. I never even saw the people at the back.

People get upset about the perceived loss of privacy but in reality, your neighbours won't be spending their time looking out the window at you in the small yard.
 
Well as the precedent is set, you will now be able to easily get planning for the exact extension that they have built...
 
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