What to do regarding a faulty HVAC replacement?

Question Details: My husband and I went under contract on a house last month and went through the usual inspections, repair requests, etc. When we got to the appraisal for our VA loan, the appraiser discovered the air conditioning was out. The seller's agent said he discovered it the day before and was working on it. They replaced the unit with a 5 year older different brand and said that we were good to go. We had an HVAC inspection for piece of mind and it was found that the new unit was not a match and not functioning at its potential capacity. Also, there was rusting and it had paint chips and the inside unit had fungus, leaks and rust as well. We are 16 days from closing and when we presented the report to the seller's agent and asked for a replacement of the system, they shot back that they were within contract by having a functioning unit and weren't going to replace it and if that's what we wanted then we could cancel the sale and they would sue us for breach of contract. I don't know if we have any leverage. Our agent says its a lot of gray areas but I feel like it would be more against them than us.

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