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No, everything is correct "according to the letter" - I have encountered this situation more than once, and it has been discussed many times. As for "the spirit" - I don't know, it's still a building capture, but according to the rules, Battle is a restart after an encounter, and nothing more, so I'm not arguing.
1.2. Restart after the first encounter up to 115-116-117 inclusive for fast, medium, and slow paths, respectively.
An encounter is considered a direct contact between players, i.e., any battle between them (a battle between any heroes, a battle with the garrison of an enemy castle or mine).
So, the contact happened, but without a battle; he surrendered his city.
