AI can completly conquer all cities and castles of enemy factions !
A small snipet of my game here, to illustrate how far it goes :
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In my game, arround day 300, Swadia is no more. Only villages remain and tiny party of 15, mostly militia. Ocasionaly a party of 90 surface but it rarely last long.
Rhodock (not my nation, but an ally) got all Swadian towns and one Kherjit town
Unfortunately, Vaegir, my kingdom is nearly in ruins too, thanks to Kherjit (stole Reyvadin) and the Nords (both Kherjit and Nords occupied Khudan, which we retook only once)
It sure feel a lot more lively than before ! Vagir attempting to rise from ashes !
Just wait and see (Astarsis attempt to rally a few peasants to his cause

)
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Another thing, player can be given castles and even towns as fief. I got Khudan when it got liberated
It generate revenue (a lot !), but right now it cannot be managed or garisoned
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Final tidbit: if you play with a particular play style, you may make some very special friends and allies. But they don't show up on the map
friend: Rhodock Sharpshooter !
(Sounds like Robin Hood, he's not on the lords list... I used to have a friendly lord listed as friend before)
enemy: The Dark Knight ! (I'm not kidding - it used to be Haema of the Nords before)
What I did was rescue villages and stop pillaging, and starting to do more toll duty on caravan rather than slaugter them. Anyhow, I think that was what provoked the change. You remember what the Dark Knights do, right ?
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