A wafting scent of rotting food and rancid grease meets the nostrils, emanating from at least 70 commercial garbage bins that line the walls of the iconic Sydney Building.

Shattered glass crunches underfoot, and pedestrians have no choice but to play chicken with vehicles as they make their way through the area.

But under the City Renewal Authority's new plan, the "pretty ugly" courtyard will be transformed into a space for outdoor dining, pop-up festivals and markets.

City Renewal Authority chief executive Malcolm Snow said development approval was received this week for new waste enclosures to reduce the number of bins from about 80 to six in Verity Lane and another six in the Melbourne Building's Odgers Lane.

"Seeing is believing and it's really just a case of looking around us and seeing what needs to be done in the short term in relation to reclaiming what is actually public space," Mr Snow said.

"The Melbourne and Sydney buildings are some of our most important heritage assets in the city, but we recognise, and the government recognises that one of the most important things we need to be doing as one of our revitalisation efforts for the city centre is to focus on the Sydney and Melbourne Buildings particularly in terms of bringing them back to new life.

"You can see it's pretty ugly, it's not been particularly well-managed and I think the territory recognises that we have to play our part, as do the traders, in relation to claiming back this space."

Mr Snow said the area would become free of garbage bins as they become enclosed in one area, and free of cars.

He said while the perimeters of the iconic buildings were important, the courtyard spaces were "in many respects more interesting and more engaging as public space".

"There's just so many opportunities, it's rich with possibilities.

"We need to literally clean the place up but not make it so sterile that it loses that character that it already has," Mr Snow said.

He said Verity Lane would be used as a pilot, with possible expansion to other courtyard areas of the city if it succeeded.

The project would cost about $400,000 for the two courtyards.