If the brake pads almost reach but are less than a mm away you can take a round rat tail file to the slots in the Weinmann brakes to get them there.
How big a selection of tires do we need? The 27 1 1/4" is the type of tire he's looking for for his type of riding. If he were thinking of making it a century rider with expensive Grand Bois tires than he would have to go to 700c.
If you want fenders, (and you should) and there is not enough space (although I bet there is) than going to 700c would give you a little more room.