[X] This was not a decisive blow, merely a painful setback. It wasn't even a defeat! You achieved your operational objectives and pushed out the forces responsible for this. Operations will continue. Continue the war, now racing internal dissent as well as Loyalist pressure.
-[X] If you can make it unacceptable for Blackwell to keep waiting you out, he'll be forced to attack you, guaranteeing you a crushing, heavily symbolic victory. Put about on public broadcast announcements that you're planning to recognize Buffalo and surrounds -- including the Niagara Isthmus -- as an independent and free city, and are organizing elections to that effect. Blackwell absolutely could not ignore that, and would be politically required to launch an attack immediately, which would get him slaughtered. The downside is that you'd need to get the population out, because anybody remaining behind would have a death sentence on their heads. Something to demand in the peace treaty after you crush Blackwell's assault, in exchange for returning the physical location to him. Also...well, this looks fairly callous, and being used as bait for a trap won't really make the people of Buffalo grateful, much less being relocated from their homes under threat of death afterwards. And if you don't get peace, somehow, you're in the nasty position of having to evacuate a city under siege using your logistics...or leaving it.
Seems like the most likely option to finally end this miserable campaign. Bad for Buffalo, but given that we will have to return them to Victoria anyways, it ain't like the other options are any better for them. Also bad for PR, but i am willing to take a hit there just to make sure we get this over with.