You have it correct
Viewing post in Problems I'm not sure are bugs or me not understanding
hmm I must say I find that a bit arbitrary of a system lol, that you just couldn't do the upgrade even if you wanted to, rather than you just deciding to make villages subsidiary to big cities because that'd be useful, or that you couldn't decide what happens in some small village as their overlord, but okay, it's good to know it's just the rule of the game and not some kind of bug or a thing I couldn't get to work.