I would refuse to release the property out of contract until they agree to return your money.

No payment before lien releases are given to you, shows that the contractor is a actually paying his bills too.

Next, can tenant B afford to be there on his own or can tenant A & C qualify, if so, have tenants A & B sign an addendum releasing A from the lease then right up another addendum adding C to the lease. 

If there's no language in the contract about unforeseen increases in material pricing, he may be stuck and you need the advice of an attorney.My suggestion is to see if you can get him to pay you for the release. 

Now that I think about it even after we got released from the junk lawsuit and sent that schmuck client his remaining escrow funds I think his tenant came back to us a few times over the years and filed some more junk lawsuits against us for that brief period we managed his slum.

By my quick calculations, including the mortgage payments, you would be looking at about $1200/month negative cash flow.You have almost $300k in equity trapped, to be released in your custody once sold.There's no question this is a sale.

This is when useless bodies like FHA come in and start dictating owners how to best take care of the property. 

@Joe SplitrockThis will end when enough landlords with non-paying tenants start suits against the government for not enforcing contract law.The CDC is not a law making body, and recconendations are just that, and nothing more.This charade will end the moment we start demanding our government follow the law!

I would not release anyone from the lease, I would not "re-qualify" any one party - I would expect performance to the lease. 

I think that new release is misleading.