If they are checking the vehicle if it is encumbered or not they have clearly had an issue themselves before or know someone who has.
By the souds of things, they just don't want to get caught with the situation.
As the seller I believe you should have checked this before advertising the car if you knew the situation from before. I understand you did pay out RAC, but did you not ever check the records after to make sure?
Unfortunatly I think you should give the deposit back. But at the end of the day, this choice is yours.
My 2c

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2000 Mitsubishi Evo Tommi Makinen - Diamonds are a girls best friend.
Tokyo Motorsports - www.tokyomotorsports.com.au