Wow, that was a bad way of listing that property and then trying to milk the buyer of it who had no control over how they listed it for sale.
The guy should be able to keep his place he bought and it listed as residential.
Or with the mistake they made, they would need to buy it back from him at the going new appraisal for its updated/remodeled price.

That is just too big of sellers mistake and too long before trying to reclaim it as other than they listed it for, that from their own mistake at others/buyers expense.
He should get to keep what he bought just as it was sold and listed as, residential property.