Death of applicant prior to moving in (roommates involved)

[Chad Braungart]

So I have a very rare and unusual case here.  I have an open apartment and showed it to a group of three friends.  They apply and everything goes through as far as screening and we sign the lease and received the security deposit with the plan to move in March 1st.   I advised them that they could move in earlier if they wanted and were planning on moving in on the 20th.  I receive a call on the 14th and the lead guy let me know that one of the friends had died and they wanted to break the lease agreement.  At this time I had to pause but decided to return the security deposit (which I still have).  

I have in the mean time begun to show the apartment with a lot of new interested applicants and advised a few other people who have applied that the apartment is now available again.  Just today (2/17)  I received a call from him and now he lets me know that they still want to move in now.  They would plan on moving in and would look for a third roommate.

I'm stuck here as I have advised many people that the apartment is available but now I have a lease that has been signed by 3 people but only two are alive.  I'm thinking that the lease would become void due to the death but I'm not certain.  My thoughts are that they would need to be rescreened based on the income of the two people as only two people would be moving in before they find a 3rd roommate and resign a new lease.

I'm trying to figure out the best way to handle this situation as I'll be letting some people down no matter what I do.  

Any thoughts or ideas on how to move forward on this?