Policy DF1 of the draft new London Plan outlines requirements relating to planning obligations and is based on a city-wide strategic viability assessment, the London Plan Viability Study (LPVS).
Part A of the policy says that applications should provide the necessary infrastructure and meet other relevant policy requirements in the London Plan. It adds that "viability testing should normally only be undertaken on a site-specific basis where there are clear circumstances creating barriers to delivery".
Part B of the policy states that if an applicant "wishes to make the case that viability should be considered on a site-specific basis, they should provide clear evidence of the specific issues that would prevent delivery", in line with London Plan policies, before submitting the application.
But the inspectors, in their report published on Monday, said the mayor should modify parts A and B of the policy "to make it clear that the requirements relating to site-specific viability assessments only apply where relevant policies in local plans are up to date", including local viability assessments.
They also cast doubt on the effectiveness of the LPVS at a local level.
The report states: "Proportionate viability assessments at local plan level will almost certainly need to go into considerably more detail than the LPVS, including where necessary about key sites, taking account of locally specific evidence.
"The plan needs to reflect this fact, and the inevitable limitations of a strategic-level viability assessment."
It adds: "...it is only where there is an up to date local plan in place supported by appropriate viability evidence, that we would expect full weight to be given to the assumption that planning applications that fully comply with all relevant development plan policies are viable."
Sarah Bevan, programme director for planning and development at business group London First, said the recommendation weakens the policy in the draft London Plan and "shifts more power to local authorities".
"The inspectors note that the plan-led approach to viability will only be effective in London where there is an up to date local plan in place supported by appropriate viability evidence that goes into considerably more detail.
"Where a local plan is in place, applicants should use local policies on viability not those of the London Plan. But where the plan is not up-to-date, they should defer to the London Plan.
"It gives both developers and the boroughs more flexibility to tailor development to meet specific local housing need. This is certainly a more pragmatic approach".
Bevan said that if boroughs had strong enough evidence, they could justify a departure from the London Plan policies on viability, particularly around the mix of affordable housing required.
The 2018 NPPF introduced a plan-led approach to viability that aimed to encourage viability assessments at the plan-making stage and allowed such assessments at the application stage only in specific circumstances.
The London Plan inspectors also recommended that the plan cut its proposed small sites housing target by more than half after finding it to be "neither justified nor deliverable".
The inspectors also concluded that the draft plan may need to allocate "many hundreds of hectares" of additional land for industrial, storage and distribution uses, including potentially on green belt land.