Oasis Cafe owner Ron Ford said while the takeaway on Royal Albert Drive has been "very successful", the restaurant upstairs has struggled financially and been closed for years.
He was granted approval from Scarborough Borough Council today to turn the first floor into holiday accommodation and add a mezzanine to create two bedrooms.
A total of three objections were made against the plans, including one which said the site is "not the right place for such a development".
The objector said: "There should be no accommodation built on the Marine Drive. Holiday or residential.
"This could be the start of many applications. Where would it end?"
Another objector stated the restaurant "ought to be viable" due to its prominent position on the North Bay seafront.
However, councillors unanimously backed the conversion plans at a meeting today.
A report to councillors said the change of use would not affect the conservation area as the building would not be altered externally.
It also noted that the cafe makes a "positive contribution to the character and appearance of the North Bay area."
The report said: "The restaurant has been failing for many years and has been closed for a number of years.
"The site will retain the takeaway facility that remains viable."