At some point after you've left Fargrove, the town will be locked down by order of Captain Okatta (sometimes called Captain Okotta). Triggers for the lockdown include acquiring a moonstone and progressing far enough into the Way of the Tiger quest in Arindale. That means, among other things, that you can complete the initiation quests for the Celestial Order and the Guild of Mages before the lockdown takes place.
Fargrove will open back up after you've placed Galdryn's Horn in the Chamber of Spirits in Talendor, and after you've returned to Emmindor to tell him the news.
Once you've entered the town, you'll be directed to see Captain Okatta inside the castle. Since all other areas of the town will be closed (even the jailhouse will be unavailable), you might was well do as you're asked and head for the castle.
Note: If you're playing the Collector's Edition, then before going inside the castle, you should jump into the moat, where you'll encounter a thief named Gemmini Rickets. Rickets will attack you, but he'll drop a black key and more when he dies. You'll be able to use the key to open a door in the dungeon (#9).
Inside the castle, you'll be attacked by a bunch of Barrowgrim's men, including a Barrowgrim Archmage carrying a manor key (#1). Once the battle is over, you can use the manor key to open most of the doors in the castle.
Next, you should head upstairs (Exit B) and kill Captain Okatta (#3). He's the easiest boss in the game, and when he dies he'll drop the dungeon key. You can use the dungeon key to open the cells in the dungeon and rescue a bunch of castle guards (#7) and Lord Davenmor himself (#8). Davenmor won't say much when you rescue him, basically just reiterating that he wants you to find his daughter Ellowyn.
With Davenmor saved, you'll now be able to move about Fargrove freely.
Note: Davenmor Castle was incomplete when Dungeon Lords was initially released. The doors at #2 and #9 did not work, the three treasure chests in the treasure room (#4) could not be opened, and none of the other chests and cabinets labeled on the map were in place. Most of these things have been fixed in version 1.4 and the Collector's Edition.
Besides rescuing Lord Davenmor, there are two other things you should do while you're in town: visit the moon bridge so you can easily jump back to Fargrove from other locations, and talk to Gileah at the tavern. You should have talked to Lord Graemare in Bolen Fields by this time, and you might remember that he directed you to Gileah so she could give you information about one of Graemare's agents named Mara. Gileah will tell you to seek out Mara at Harrow Ruins.
Graemare's quest is required to do much more in the game, so you should head to Harrow Ruins next, and then you should travel to Skuldoon, the third and last town in the game.
1 - Battle
2 - Tower
If you're playing the regular version of Dungeon Lords, then this door won't open. If you're playing the Collector's Edition, then this door will lead to a small tower area where you'll find a level 7 armor chest.
3 - Captain Okatta
4 - Treasure Room
If you're playing the original version of Dungeon Lords, then you'll find that this is a treasure room in name only. You won't be able to open any of the chests. If you're playing the Collector's Edition, then a bunch of Barrowgrim's soldiers will greet you when you enter the room, and you'll find that all three of the (level 7) chests are in working order.
5 - Cabinet Chest (Collector's Edition)
The cabinet chest is level 10, but if you can pick it open you'll find a ruby ring inside. The ruby ring is essentially the same as a crystal of vision.
6 - Dungeon
If you're playing the Collector's Edition, then you'll encounter a mess of Barrowgrim's soldiers here, including a quartet of troll giants. This would be a tough battle if the game had decent pathfinding, but the trolls can't fit through the door to the dungeon, and so you can just sit on the other side and kill them with ranged attacks. For a quicker battle, run into the room and free all of Davenmor's soldiers. It appears that they can't be killed, and so they'll make quick work of Barrowgrim's men.
Note: If you're playing the Collector's Edition, then in the center of the dungeon you'll find the "flames of power." If these flames do anything, we haven't discovered it yet.
7 - Imprisoned Guards
8 - Lord Davenmor
9 - Dungeon Door
The only way you'll be able to open this door is if you're playing the Collector's Edition. In that case, you'll find a thief in the moat of the castle. When you kill him, he'll drop the black key required to open the door. From what we can tell, the thief will only appear after Fargrove has re-opened, and he'll disappear after you've freed Davenmor (#8).
When you open the dungeon door, you'll have to battle one or more tough wyrms, but in the cell beyond you'll find a level 7 treasure chest containing chain pro fire. If the poison from the wyrms gives you fits, then you can always draw the wyrms back to the main part of the dungeon (#6), where some freed guards will be able to help you.