Oh I'm terrible at history, I'm almost certain we were taught a biased account of it all through school (which generally was just 12 years of
ranting how an English Queen beheaded a Scots Queen lol).
Mabye another way of looking at it could possibly be to have a "Civil War" random or triggered event? There was plenty of them in those days, especially due to religious conflicts.
Or even include the crime to be accused of 'witch craft' or heretecracy (not sure if I've spelled that right) if caught poisoning wells, using the toad stuff on the doors to make people ill, etc. Or even simply if the characters faith falls too low they could be accused of it. Protestants could then read the bible to "strengthen belief" and catholics could pray with rosary, and a bonus could be applied if the actions were done inside a church (the correct religion that applies to the characters belief).
But the first idea about towns and cities losing their rights if they decline too much was just to spice things up and open up more possible options because in some maps its impossible to get imperial status if you don't start in the most developed town. It means that we could start in the smallest town and try to work our way to the top by eventually stealing the imperial status from a more developed city by causing its population to decline (by either destroying buildings, making people ill, assasinating other characaters in that town or even random events) and then trying to acquire the imperial rights after the other city has lost it.
It's just idea's though!