For the last ten years it's been a latte brown/grey, okay greige, 3 seater. I'm loathed to get rid of it as it still is so comfy, though somewhat worn and faded. Desperately trying to the find a drill, cotton or linen in a bright teal/ kingfisher/ peacock blue to re-cover. Something like this...

Congratulations on your new home. I think you have been very sensible to live in it for a year before starting your decorating, it has given you time to consider the lighting and aspect of each room in all seasons as well as time to evaluate how you want to live in your home and exactly what you need. The lounge does look very big and bulky and will definitely dominate the room, so I would keep to the lighter colour. Don't worry about the kids and dirt - as Kookykaren said, leather cleans easily - sharp objects and textas are your bigger worry regardless of what colour you choose. Laying newspaper on the floor to the size of the lounge is another way of checking how it will look as it gives you a better indication of bulk than tape. I would keep your ottoman simple (one with storage is an excellent idea with the children), just a tone on tone fabric or a pattern using the colours in the rug on the floor of the photo of the lounge. I don't think you have room for too large an ottoman but I would have a square one made the same height as the lounge so when just you and DH are watching TV you can push it against the other end of the lounge and both have a chaise. You can then bring some colour with art work or some patterned cushions on the lounges.

I had a 2nd hand lovely resort style lounge (cane with fabric) which quickly became pulled and tatty after my 2 small dogs had been using it. The leather lounge & two large leather recliners I have show no damage (regardless of long or clipped nails) and both pets love these. Having a blanket the dogs know is theirs is a great idea especially with leather, as the initial cold feeling of leather means both dogs only want to be on the blanket.

How many people do you want to seat? Is that a walk through beside the stairs? Is there a view out the window? My first instinct is to say two sofas facing each other so everyone can see out the window and enjoy conversation.