[mothered]

Should I say that I managed to recover the laptop and proceed from there? But since I told them that the battery exploded or was close to, wouldn't that be a shipping hazard or does that not matter?

If It's a shipping hazard, It will work In your favor due to the carrier not accepting the Item, and the fact that you're complying with Lenovo's request.

Understood, this is the email draft I have so far, "Luckily, I was able to recover the laptop from the electronic disposal store, as they had not thrown it out yet. It actually looks like the battery has degraded even more, I can ship it out if need be."

Looks good, however If they're going to request the return of the laptop, you need to make sure that the carrier will not accept dangerous/hazardous goods.