Live-music venues and well-managed bars, clubs and pubs should be exempt from the controversial 1.30am lockout covering Sydney's central business district and Kings Cross, the City of Sydney will recommend to the state's review into liquor regulations.

In a position that puts the council at odds with Premier Mike Baird, Sydney lord mayor Clover Moore said it also wants venues that had good histories of complying with liquor laws to be excused from the 3am "last drinks" rule.

The council believes a middle ground needs to be found to maintain the safety of the community while ensuring late-night venues remain viable.