So I am a returning Ultima fan. My question is something I forgot about. Do enemies in dungeons respawn? For example the giant rats in Lord British's castle sewers.

I know for a fact that some enemies do, indeed, respawn. Specifically, I remember hunting some enemies in a cave for some drops and then selling them; when I return the enemies would be back.

Be aware that any item dropped from a respawning enemy will disappear if left on the ground. This includes any containers they drop. If you want to keep an item from despawning when not in your inventory, you need to put it inside a container that was there at the start of the game (like the chest in your room of Lord British's castle).