Sounds like this developer basically offers a hosted CMS service. He designs the site, hosts it and the client uses the developer's CMS to update the site - I assume that the client did not pay for the development of the CMS, only the design and integration of that design into the pre-existing CMS. The CMS belongs to the developer. He is not an employee, he is a contractor, so employment rules are irrelevant.
Providing a hosted CMS service is a great business model, one I've run myself over the years. Of course one of the key issues is that you don't ever provide the source code to the CMS, and clients can't take it away with them. On the flip side, it means the client have significantly lower start up costs, as they are not paying for the development of a CMS.
If the client decides to use a different developer, then they cannot take the CMS with them, it's not theirs to take. So the developer provides a static output of the site to the new developer, who in turn would use that to set up the new site.
Obviously this would be easier if there was a contract and a CMS licensing agreement that made everything clear. In that respect the developer definitely needs to rethink the way he goes about his business - you cannot provide this kind of business model without providing appropriate licensing and contractual documentation. The domain name issue is also odd. As for not providing timely updates - what kind of updates were they? Outside of the scope of the CMS? That's really the point of the CMS, i.e. the client no longer relies on the developer for site updates.
As for the client, I sympathise as it seems they were not made fully aware of the situation. Basically (it seems) they were simply licensed use of the CMS for as long as they pay their hosting fees and use that developer for updates. I hope the price they paid reflects that restriction. The downside is that to move away, they effectually have to start all over again, although at least the design and content is already available. Although they might want to check that they own the design....