Either do as mickyc suggested or give them a notice of probation. Give them until Christmas to show you they are willing to shape up and make change or you won't be able to continue care.

Since the space is available for the daughter and they are paying for it now but you refused care until the child is 12months of age I do feel you need to return that money. If the space was open and they didn't want to use it until January then i would say keep the money but they wanted to send her and were not allowed to.

If you keep them I would not expect change in the older child without effort on the parents part (and yours) and I would be prepared for the new child to be equally as challenging (but she could surprise you).

It is important to remember that you need to put YOUR needs first not theirs. Yes, they will be put in a hardship here if you cancel care. But, odds are any other daycare they signed up for would be in the same position. It is their parenting style that is causing issues and they need to make changes or handle the consequences of there ways.

I would give notice ASAP if you plan to term, so they have more time to find a space for 2 children before january. At least mom is already off work right now so they won't be scrambling for care until January when they expected to be back at work.