If the paint is chipped/peeling, the lead was already released as dust.

Those funds should only be released when you walk through the property and see that it's vacant and clean.I agree with @Mike Cumbie  Post-closing occupancy is generally a really bad idea. 

I have been told that they can not by law withhold a payoff statement, so what can I do to get them to release it and help the sellers get left with nothing? 

The clause says exactly: “...If the Seller and Buyer cannot come to an agreement on rectifying the problem then the contract will be deemed null and void and the earnest money will be refunded to the buyer without interest.”Our realtor is saying that in order for us to get our money back, the seller needs to sign a release and it isn’t looking good and we may never get this money back. 

You need an authorization to release information in case you need to speak directly to their lender for any reason.

I do not extend any allowances after this if they fail to bring in the rent.

I have been on the water meter list for over twelve years for one of my property’s upcountry, I am #708 out of over 1200 on the list and I was told they are around the mid 80’s as of the beginning of the year (2019) and they are only releasing 30 water meters at a time.

I'm not sure to what extend lending institutions would be will to provide their general terms upfront?

With low LTV, counter-party risk minimized by Sec 8 as payee and reserve account allowing ample time to release / address turnover, this is a proven strategy. 

But if you are out by X date and sign a release, I can drop the hearing.