Celebrim
Legend
In all editions of D&D, there have been different levels of punishment for paladin misbehavior. "Fallen paladin" is the ultimate punishment. Applying it in this situation is like imposing the death penalty for jaywalking.
The situation here is that the Paladin has knowingly and willfully behaved in a manner that is dishonorable. I realize that the situation in 5e is slightly more ambiguous only because the 'Oath' mechanism means that not all Paladin's see their honor held in the same way, and in fact a Blackguard is just a Paladin with a different 'Oath'. But for the majority of Oaths, this is still a willful violation of their oath and honor because it's cowardly, fails to protect the helpless, makes a bargain with an evil being, etc. For the majority of Oaths, this is willful violation of an Oath.
And for most of D&D history, loss of Paladin status was the standard for violation of honorable conduct. The only real difference is over how easy it is to get it back. If the conduct was not willing or knowing, such as the Paladin violated his Oath through ignorance or magical compulsion, then you could 'Atone' and get it back.
Now, as for the specific act, it's mostly (but not entirely) an act of passivity, which as I judge alignment is a (mostly) 'Neutral' act. That is, this would have been fully in character for a Neutral character, and as such wouldn't cause me to suggest possible alignment drift by the character. (If the Paladin suggested the bargain, that would have been unambiguously 'Evil'.) However, even if it isn't an 'Evil' act, it's still an act of indifference to the suffering of others that led to the unopposed death of a helpless character. And it's an act of cowardice. From the perspective of a pure good being, such as the sort that ordain and empower Paladins, everything that falls short of the ideals of Good is unholy. The Paladin's purity has been lost, and it will be very difficult to regain it.
At minimum, as I see it, this is loss of Paladin status and a very long road to regaining it. This is Lancelot has betrayed his Lord and friend level stuff, time to become an acetic monk and spend years paying penance stuff.
And while I might not necessarily run a scenario like this, this is high narrativism: "What does your character really believe?" stuff. Clearly, the Paladin was tested in Love, Faith, Hope, and Courage and failed pretty utterly. You do not get to represent yourself as a champion of good anymore.