They also claim that we need a city inspection before releasing the tax certs, yet I have closed with a city inspection post close and have confirmed with the city that tax certs and a city inspection are independent. 

Send a notice that the additional damage will be repaired (and billed for) OR, if she chooses, she can be released from the lease without penalty if she moves within the next 30 days.

Have you read the book that recently released?

At the conclusion you authorize escrow to release the 50k.

Get all the paperwork for your review, try to do this as part of reconcillation and retention release since they will need to send a final bill for retention when they are complete.

As an alternative, I am requesting contractors to sign hold harmless and release of liability agreements.

If you're funding with a hard money loan with an escrow holdback for your contractor draw schedule, it's really going to be up to your lender when and how much of that is released.

Then 1) check their license with the State website. 2) Ask for liability insurance and insist you are named as additional insured. 3) Make sure they are bonded as well. 4) Check their Workers Comp policy, make sure it is current. 5) Always get a lien release before you pay in full for a certain phase of the work like plumbing/framing/electrical etc...6) Never pay upfront, other than possibly materials...a decent Contr should have enough in savings to get going on a job.

Federal liens are NOT released from a sheriff's sale for state taxes.

I would have also considered increasing the Earnest Money by alot (10-20K) and having it released and made non-refundable to grant the extension.