This may seem like kind of a daft question, and I've asked it before, but I think it was on that provisional forum that existed between the old message board and this new one, and I can't find it again.

What possesses a warlord to divy out his land in return for military service, if (as book of the warlord suggests) there is no downside to just holding the land directly through hired administrators and paying your army a salary. I always used to think that it was an issue of distance and communication, that there was only so much ground a single ruler could cover and so he had to delegate to sub-rulers. But if an earl on one end of Britain can hold a parcel on the far side of the island, reliably collect it's income, and keep it safely garrisoned, then there doesn't seem to be any problem with distance or communication. I mean, the Romans had military forts and civilian governors.

Why would he estrange the land from himself? Why give him a village that may produce around what a knight needs to feed and equip himself, when the warlord can just sit a steward in there like he does with all his other estates, and pay for the knight and his family out of his own pocket, like a house knight or any common soldier?

I mean sure, you can say cronyism, but if I were looking for cronies I'd rather just pay the guy if that's apparently something I can do. So why organize your kingdom this way?

Land creates a tie that's stronger than coin. Leaving aside questions of personal loyalty, if custom says the overlord can take back land if you stop serving him, you won't be so keen to risk losing your income by going "off the reservation". Land ownership creates a buffer, too, which highlights issues of personal loyalty. On top of that, it's a part of the culture: while, in pure economic terms, holding a £100 estate could be compared to being paid £25 (10% discretionary, 10% family, £4 for the knight and squire and £1 for the wife) or so to manage a £100 estate, the fact that it's by way of landholding elevates the relationship in the culture's eyes to a personal one based on loyalty between lord and vassal. There's also the historical element of where the feudal relationship developed from, in many cases; no "Big Man" is going to feel good about handing over his lands that he's been protecting from bandits when a "Bigger Man" comes along, so the Bigger Man lets the Big Man and his heirs retain their holdings and swear homage. This is the cultural model in which holding land becomes important, even if it's "at the whim" of a greater Lord. Land is important, it means something and the holding of it is a significant matter over and above the economic considerations.

I was hoping to find my answer in that temporary forum and just repost it, but I couldn't find the temporary forum again and apparently you didn't find my answer then convincing enough. But in the interests of at least trying to give some kind of an answer... (I am not pretending that this is the best or the most exhaustive answer to the topic, which keeps professional historians busy with research even to this day.)

Historically, feudalism is thought to have arisen in the tumultuous times of the Dark Ages. Long-distance travel & trade were dangerous and not that easy. Coinage existed, but most of the trade was barter. But the king still needed soldiers. So it made sense to tell a trusted guy: "Take the extra produce from these peasants over here and use it to support X number of soldiers. Train them and lead them, and when I need you, I will call you to muster." Originally, it was what in Pendragon terms we would call a gift or even just for the duration of the king's pleasure. However, at some point the warrior-nobility woke up to the fact that they had their own loyal warbands and the king was dependent on their support. And a condition of that support was making those gifts of land inheritable (grants in Pendragon terms). Especially during the viking age, 800 - 1000 or so, the Frankish kingdom basically fragmented into an anarchy as the castellans (officers in charge of the local castles) became independent of the discredited Carolingian Kings. The new line of Capets was just the first amongst their peers, and even that more in name than in actual fact, owning rather modest lands around Ile-de-France compared to the richer and larger fiefs that the Counts of Anjou, Champagne, Blois and Toulouse (to name a few), let alone the Duke of Aquitaine, had. By the time the King of France started to actually rule rather than reign over his kingdom, the feudal system was already firmly in place and hallowed in tradition. If the Carolingian Kings had had the choice, they would not have allowed for such independent power bases and, as you say, keep a tighter rein on the nobility or even prevent the fiefs from becoming inheritable (at least by default).

Now, that explains the historical circumstances at the baronial level. Things amongst the common knights is slightly different, and of course Pendragon itself will differ from actual history in the development.

For Pendragon, we will need to look at post-Roman Britain as the background, and Vortigern's reign and Aurelius' defeat of Vortigern in particular. What I personally think happened:
Vortigern's efforts to displace and split the tribes, combined with the decapitation of the tribal leadership in the Night of the Long Knives and displaced populations (exiles from Saxon lands or to Brittany), pretty much ensured that the old tribal affiliations (probably already weakened by the centuries of Roman rule) lost their binding power. At least in Logres. However, there were still some local leaders able to command support. When Aurelius landed, he needed the help of these local leaders, and in return, he promised to reward them with titles and land; basically a guarantee that the land would be theirs and their heirs in perpetuity, in return of military service. However, in order to prevent localized rebellions that had plagued Vortigern's reign, he made sure that those lands were scattered throughout Logres. Thus, the system of baronial landholdings with their outliers in Book of the Warlord.

(Personally-personally, I actually prefer the regional chunks of older version (each county being under a count and that is it, very little in the way of outliers): makes my life as a GM so much easier and I didn't want to change the campaign in midstream. But I think the above works with the official version.)

However, this doesn't really answer your question, does it? You are not asking why the King would have to recognize the already powerful local elite, but why the local elite would then give lands as grants to mere knights, right? Why not simply have household knights and stewards and do it that way? It is true, that is the more efficient way of doing it from the Baron's perspective. My personal take on this is that it comes down to rewards and societal pressure. Generosity is one of the most praised qualities a leader can have from Iliad onwards, second only (or even equal) to valor. Armlets and rings are all good and well, but they won't feed the family long when you are gone. Getting a grant of land will: it ensures that your descendants (at least the elder branch) is set in perpetuity. They will all be part of the elite landholding classes, and who knows, maybe one day they will claw their way up to become barons, too!

A Baron who is overly stingy with the land (that is, who doesn't give any land away to his knights) is not a lord in whose service you have any advancement prospects. So why spend your years and life in such a man's service? Even if you stick to your oath and do not desert him, there is no doubt that extra bit of hesitation before you throw yourself between him and harm (low Loyalty). But many other knights would desert such a man until only the dregs would remain (knights who cannot get accepted elsewhere for lack of skills or with bad personality, or even jumped up cavalrymen). How much better to serve a generous Baron, one who would reward his followers with land! Not that every knight reaches that coveted status of a vassal knight, but the CHANCE is there. If you work hard and distinguish yourself, you might get it! So not only would such a Baron attract a better quality of knights, they would be fired up to prove themselves (high Loyalty), too.

Now, lets say that all the Barons would say: no more grants to any knight ever for any reason. How long do you think it would take the normal knights to go, wait a minute, we outnumber these guys 10 to 1. Why are we letting them hoard all the land? What is the difference between them and us, really? By having this ladder of advancement to landownership, too, the Barons get the best and the brightest knights co-opted into the system, while dangling it as a bait in front of everyone else. Kinda like the American Dream. :P Also, I expect that quite a few of the vassal knights can trace their lineage to royal/baronial bastards or Nth sons, who were given a little something from the family holdings to ensure that they'd get something to go on, too.

In a way it frees Loyalty from Coin.
The loyalty of a household knight is mainly based upon you paying him. As long as you pay him the coin and support him you get his loyalty. If you ever come up short it the loyalty is also gone. Supporting him is an obligation and you lose honor if you cannot support him.
The loyalty of a vassal is not based on Coin. You have granted him lands that will support him and he is now responsible to support himself. If money is short (due to bad harvests for instance) it is up to the vassal to see to it first. Helping him in these cases is a sign of generosity.

Secondly it will secure not only the knight, but also his heirs to you.

Expanding further on the previous post is to look at how the household knight fits in, and what he stands to gain.

The household knight is a lord's military family. His closest friends and bodyguards whose lives literally depend on each other in battle. The loyalty given the lord is repaid by being given subsidence, but there is also the chance for the household knight to get more. If an knightly officer needs to be appointed, where else but a favored household knight to appoint to the position. (Which, by the way, comes with perks and possibly gifted lands to help with expenses.) The lord ends up with a young female ward/heiress and needs a guardian for her. Another opportunity for a favored household knight.

And also consider that many of these household knights are coming from the lower nobility, are 2nd (or 3rd) born sons, and do not have many other avenues for social advancement beyond attaching themselves to a lord's retinue, gaining favor, and possibly getting awarded. It is essentially co-opting into the system, and also a knight taking consideration of possibly wanting to settle down and leave something for his descendents.

A book recently mentioned in the forums, _The Greatest Knight_ about William Marshall tracks such a rise since he followed such a course in serving princes and kings during the period that the early Pendragon periods are semi-emulating. Said book also points out one of the conundrums the kings and princes had - a constant demand from followers to be granted lands, and a limited pie of lands to hand out, since they also had to keep sufficient properties for their own income and support.