I hate to beat a dead horse but here goes anyhow...
This portion of the rules...
"the retreating Noble(s) must be moved to an adjacent area that does not contain any city or Nobles belonging to another Baron."
Should this be read that while retreating you may not enter a space that is occupied by any other Baron's nobles.
You may not retreat into a space containing a city controlled by another Baron.
I would think a more approriate reading would be you may not retreat in to any space that contains a city.
You may not retreat into a space containing hostile nobles. No agreement may be made to permit retreat into spaces occupied by an other Baron's nobles.
My though is this...
retreating should be a penalty. Therefore you should not be able to move onto a city neutral or even owned by you. Because in both cases you gain the advantage of not having to move to capture a city (or aid in the defense of the city.) Since retreating from combat with another noble does not leave you exhasted, you will likely attack the other noble since he no longer has his active ability since he is exhasted. This makes the attacker have a much harder time. Since in essence he will have to fight twice (once with their special power and once without since they will be exhasted.) At the very least if the purpose of the attack was to displace your noble, being sent back toward your own cities actually makes retreating advantages so long as you do not get exhasted.)
Please share your thoughts.