Legal Question in Real Estate Law in New York

Was this a condition of the contract? Does the buyer want the house with the tenants? Do tenants have a lease?

You can't cancel the contract unless your lawyer a clause in the contract allowing you to do so. The buyer can cancel the contract because you will not be able to convey the house vacant. You should advise the buyer, they may wish to take the house with the tenant and remove them. There would likely be a change in the price. You should offer to refund the down payment immediately, since you are not likely to be able to perform on time.