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In dealing with a very small yard, it's important to prioritize your needs and wants. Ask yourself a few questions...
Do you plan on entertaining there? While you could set up seating on the terrace, setting up a table and chairs in a secluded corner of the garden will draw guests into the space and help to create depth crucial in a smaller space.
Are you interested in dabbling with flowers or vegetables or is a low maintenance, all green landscape more to your liking?