LOD is required due to the computer's ability to process the amount of data. This has nothing to do with Trainz; it's just a lot of unnecessary data using up resources that are best used by other things. If you have your tree, for example, with 14,000 polygons on its mesh, why would you want to still load up all 14,000 polygons when the asset is located 10 miles away when you only see something about the size of a pixel? The resources needed by any computer or any program, for that matter, will cause a slide show. In the example of your single tree, try multiplying this by several 1,000s and your computer will stutter and stall.
The problem you are seeing with this particular tree is a poor implementation of LOD. There's a recommended breakpoint and asset size where the next target is supposed to replace the current asset. If the content creator did not follow those rules, you'll end up with the issue you are having.
Anyway, LOD is used in other graphics intensive programs including Cities Skylines, Arma3 and others just thinking off the top of my head. How the LOD is implemented and how well the content creators follow the rules determines not only the quality of the breakpoints, but also the performance of the assets in game.