I think the issue is different here. PFA three files corresponding to
a coarser version of grid-2 mesh. First is the original coarse mesh,
second with single refinement, and third with two refinements. The
first refinement doesn't cause any issue, but second does. In the
first refinement, all cells are inner cells, so appropriate changes
are made to all the boundaries. But in the second refinement, there
are outer cells and inner cells, and only the inner cells are
refined. This causes a contradiction, because the outer and inner
cells share a boundary: the middle circle. Because of refinement of
inner cells, they get a new outer boundary, but the outer cells retain
their inner boundary, creating discontinuities at the middle circle.
This point is further proved if we change the refinement strategy to
the one mentioned in the "Possibilities for extensions" section. This
time, all the cells with center lying on the positive y side,
are refined . Even though boundaries are still curved, it causes no
issue. PFA "grid-3-coarse.svg" and full code also.