They're not asking for "free rent forever" - I don't even know where
people are getting that idea. Please read the proposal again - they're
offering to continue paying as much as they're able, up to 50% of
their budget, with the understanding that this would settle any
outstanding debts.
Robb, are you talking about the "Out of the Blue" event which is
specifically mentioned in the email you forwarded, which they say was
a miscommunication which they're willing to move on from?
If we're talking about good faith, the most important aspect IMO is
the ASSUMPTION of good faith. That means when someone tells you what
they can afford, don't accuse them of lying based on snap judgements
about their clothes, or of secretly hiding donations because they're
fiscally sponsored by someone else, or of embezzling money just
because someone else "completed the contract" for an event, or of
"holding back-rent as a carrot gift" when they're clearly just trying
to settle their debts in whatever way possible.