Before the bump in the move-out offer minimum, they could have done an Ellis Act eviction if they wanted to recover for their own use while paying you the minimum possible. (Actually, Ellis Act is one of the only eviction types allowed right now.) That said, it sounds like they wanted to have their cake and eat it too, so it's too bad you didn't feel like taking them to task.

Umm... while they can't withhold your security deposit, squatting someone's in-law unit is obviously immoral. It's not your property, if they want it back, you have to move. Holding them hostage for $10k is scummy.

If you don't to give up some of your rights to others over some property, don't rent it out.

California isn't a feudal society, yet.

It's not squatting. They are tenants and have rights to the property as well. The landlord can get them out, but has to follow the legal process.

The GP didn’t mention a lease so I assumed it was month to month, in which case the landlord terminated the lease and the renter moves out.

If they had a longer lease, then I’d agree the landlord can’t force them out before the lease ends.

Rent control throws a wrench in this simple model. In Berkeley, the tenant almost exclusively has the right to terminate the tenancy. Expiration of lease or month-to-month term is not actually grounds for the owner to terminate the tenancy.