Closing day, loan funds but no title -- Help!!

[John Lee]

Need some help and advice from anyone who might have faced a similar situation: We came to the day of closing and got notified from the escrow office that the city had placed a lien on the title due to an inspection issue (minor fencing issue). We financed a conventional loan and it had funded, but since we were unable to close and obtain title, the loan was sent back. Sellers admitted it was their fault and are working quickly to resolve this. They were very apologetic (we had known about the fence issue but did not think it would be that big of a deal). Now our lender is saying we have to pay close to $100 per day for a rate lock (since the fed meets soon and could raise rates, we think it's a good idea). The sellers initially were willing to pay any costs we might have, but now don't want to pay this high amount since the permitting process for the fence could take anywhere from 1-4 weeks. We could cancel the loan and reapply but we would be subject to a 0.25% cancellation penalty (since we are in SoCal, this is a significant amount). The sellers think this is unusual and don't want to pay it. Since the loan initially funded, I think the penalty makes sense. Any thoughts? Any lenders or someone with experience in this situation have any input?