Kids like grass to play on, dirt to dig in and plant things, and a sandbox. I suggest you split the area into one with the concrete and tile and one with grass, a sandbox and some plants. Grade carefully for drainage.

L-shaped seating with colourful cushions and a child-friendly table, and greenery. Use round containers where the kids can get to them. The plants below just illustrate the kind of look I'm thinking about -- your choices depend on how the sun falls and your climate, of course. And I'd consider painting the walls in a definite colour -- depending on what is in the room that leads on to it. However, when in doubt, white is good. However, it can be a bit harsh in strong sunlight.

By the way, the 'living wall' below is composed of ferns, which is a fairly budget-friendly choice for something that will use a lot of individual plants. And alternative would be to put a trellis on that wall and grow climbers up it -- just nothing too invasive. And nothing too prickly.

http://www.plantsonwalls.com/Vertical-Garden-Living-Wall-Gallery-s/77.htm

http://www.hgtv.com/outdoors/flowers-and-plants/trees-and-shrubs/grow-an-olive-tree

http://bungalowchronicles.com/?tag=prairie

Great ideas Rina! My 2 cents is to definitely not paint the walls white.....based on what looks like the color of your house, white would be too stark, bright and cold. Choose the wall color after you find your the furnishings you want to use.

Or, paint the wall the same color as the house??