Can a lawyer refuse to release funds if the paperwork isn't perfectly in order?

Yes, and in most situations a lawyer is expected to. A lawyer holding client funds in trust is generally required to follow the closing conditions that have been agreed to and any undertakings given to the other side's lawyer, and releasing funds or delivering documents before something required has actually been satisfied can expose the lawyer to real professional consequences. This isn't the lawyer being difficult for its own sake — it's a safeguard built specifically to protect the client's own money.

In the moment, this can feel frustrating if you're eager to complete a deal that's otherwise ready to go. The usual fix isn't to pressure the lawyer to release funds anyway, but for the lawyers on both sides to work out an escrow arrangement, a short extension, or a documented undertaking that lets closing proceed on a basis both lawyers are comfortable with. If your lawyer is holding things up, ask specifically what's outstanding and what workaround is being discussed, rather than assuming the delay is unnecessary caution.