Certainly I wouldn't renew, and would alter your process so that they don't get the keys until they switch.

Actually, you can craft the deal anyway you want and alter it as needed depending on the feedback or lack thereof, you get.

And can a law suit be filed against this by tenants saying they have proof of altered payments history and won’t pay the overcharged fees

You need to operate the LLC properly (mainly don't co-mingle funds and use an alter-ego).  

However, the two reasons LLC exist are (1) to produce a “remote entity” that doesn’t have the compliance complications of a corporation so that it’s relatively easy to comply and very difficult to prove an LLC is a persons “alter ego” (thou nowhere near impossible) and (2) to provide a remote entity that qualifies for “pass through” taxation benefits.  

Also, any structural alterations, such as demolishing or adding walls, must strictly adhere to their guidelines, which I assume you'll need to consider for your conversion project. 

You only have to bring aspects of the building that are being altered up to code, not the entire structure.  

We reach out at multiple times throughout the redemption period, all the way to the end.Part of me is beginning to think that foreclosure is such a touchy subject to many people, that many would rather just ignore taking any action, and just let the property go, even though our "cash for keys" and offers to list their properties give them a chance to make something good out of a bad situation.Conversely,  somewhat seasoned marketer in me wants to stay the course, and keep altering our message until we improve our response rates; after-all, people have been successfully marketing to people in foreclosure and pre-foreclosure for years, which makes me think there is hope to ramp-up response rates.Sorry for all the text, I'm thinking out loud a bit here.Has anyone had any success marketing to mortgagors during the redemption period?  

I recently got my real estate license to increase income and then by fate my friend turned me on to BP which led to Rich Dad Poor Dad and my mindset has been altered.

Zoning and codes have changed over the years, so depending on when the alteration was done it may be ok (but that's doubtful).