If you claim a town or city you should be able to expand depending on the amount of people that have claimed property in it. For example possibly for every 50 or so people living in the town the town/city could be granted an extra 200x200 piece of land to expand on and as the town/city grows more populated it gets bigger.
We'll have to see how it works out. Creating a town and city will be complicated and resource intensive. If I do my job right then there should be a nice balance that keeps them from growing too quickly. Also as towns and cities get more prosperous hopefully NPCs start to move in near the town. (Which would make expanding the existing town more difficult.)
One thing is sure, if you already have a thriving town then it should be easy to secure what you need to build a second one. The number of signatures you need is probably less and you could just get every NPC in the existing town to sign it. If you are doing a good job then they would have no problem doing that.
Like in real life, trying to manage five towns will be quite tricky. But if a player manages to set them up properly so that they mostly run themselves and has a real knack for it, then granting a city would be the next logical step. Cities will be more complicated to manage. They are larger, denser, and must provide taxes and services to the kingdom. (At least that's the plan.) So, for example, while a town or village only needs to look out for itself and send a per-capita tax to the local lord, a city will have to provide a local militia, defense for the surrounding countryside, a fortified seat of government, and open access to any important land marks like ports and harbors. Stuff like that.
...if I can make it all work.