Upgrades are limited to a Premium (G) with a minimum Intermediate (C) reservation. Upgrades are limited to a Full Size (F) with a minimum Compact (B) reservation.
Upgrades are only guaranteed for 1-Class. Whether they define one class as F to YF, F to F6, or F to G is anyone's guess as I have heard explainations for all of the above from multiple locations. I presume it would be F to G but then you get the... we don't have any G cars available at this time. So where is the guarantee?

The location was correct in stating that they could not upgrade an L. If they reissued the contract for the F rate and gave you an L then that's on them. What is the point of the contract if they are just going to breach it? They seem to nickle and dime (which is well within their right) when a customer breachs the contract in one way or another, but when they do it they seem to think it is ok or at least try to talk their way out of it (as a customer would).

Locations upgrade to above a G (I've received anything from an H6 to an L to a Corvette CV on multiple occassions) but that's really up to the location as it is well above and beyond what Hertz requires of them for a 1-class upgrade to a maximum G.

I'm curious to hear what happens because the bottom line is they upgraded beyond what the policy states, however once they voided out your original contract and issued you a new one the terms of the new one apply. They shouldn't be trying to recoup the losses for their mistake by placing that cost back on you as you both mutually agreed to the new contract and you were allowed to leave in the "L" vehicle with the "F" rate contract.