I don't think that is consider "Extortion"

Option A means - lease contract is terminated in 3 days. If he takes this option, no further action is taken.

Option B means - 3 days after, report his construction to the board and get a confirmation of his illegal construction from the board. The tenant will be evicted and reason for the eviction is "The tenant was doing illegal business in the rental property". Illegal act is always a lawful reason to evict the tenant. Yes, California always need a lawful reason before you can evict a tenant!

It just like someone breaks in your house and you tell the guy "get out of my house before I count to 3 or I will call the police". Yes, you are holding a legal action and demand other person to do your will, but it's never be "Extortion". You just declare "what he can do" and "what you can do". The guy can either leave or stay and that is totally up to his civil right. He can run and prey you don't call police. You can still call the police even he ran away.

曾經有次家裡搞裝修請了個裝修師傅。因為是熟人介紹所有也沒有查他的license。施工後發現質量很大問題才查了他填寫在contract上的license。發現City permit上的license不是我們contract上他填的number。 立刻要求終止施工和合約。此人竟然還厚著臉皮來問我要近萬元材料和工錢，還說要mechanic lien我的房子。我只說了一句"讓我問問license board你是不是應該收這筆錢吧！”。 此人立刻跑得無影無踪了。