If their bank won't discharge their mortgage and release the title, settlement won't be able to happen. It sounds to me like they're using their current house (the one you're buying) to secure their debt for the current house and the one they're building. They don't want to release security over the current established house and be left with an unfinished property securing the debt, as if the worst were to happen and they default it's harder for the bank to sell.

You can say no, but if their bank simply doesn't discharge their mortgage settlement just won't happen. I'd talk to your conveyancer about if you can charge them anything. If the purchaser delays settlement many vendors charge interest for each day that it's delayed.