However, make sure that everything is done according to the laws, otherwise they can be very punishing (for good reasons). 

I would include in that notice a warning that if Tenant C remains in the home after February 29th, then you will initiate the eviction process.I wouldn't go into detail about how you would evict or how you would punish him.

The developer is long gone, sold the lots to unsuspecting buyers, who are now punished. 

@Jay Hinrichs: my question is what is the reasonable punishment? 

Mortgage fraud is a federal offense and punishable with a $1 million dollar fine and up to 30 years in prison.

Essentially, you don't want to "punish" the tenant due to a medical issue but you also need to protect yourself. 

Some states, the only punishment is you must return their deposit.

To think someone can twist what I am and what I do to suit their opinion and then I get punished for their ignorance and arrogance.  

But the attitude I am getting from Vacassa is that this is to punish and the contract will be obeyed as long as it is disadvantageous to my friend. 

Frivolous suit bringers are supposed to be punished.