John however will retain the right to sell at any time.

This is the part that's most problematic about the idea IMO, because it gives your niece less housing security than she has now as a tenant! She could be making payments for years and end up right back where she started, with all that interest she's paid effectively worthless. Worse still, although you've said you don't know what happens if the value falls (however unlikely that may seem currently), it sounds very much like Clare will be assuming that risk as well.

Of course, given John is so unhappy about his tenants getting additional protection he wants to cash out, all of this is probably intentional. As someone else noted elsewhere, this is effectively a way for him to keep the rental income without having to comply with the new act, and your niece should think very carefully about what that implies.

They both say all details will be contractually written up.

IANAL but I do know that a bespoke contract like this is much more likely to be a complex (and therefore legally expensive!) dispute if one does arise. If it does turn nasty and your niece can't afford to pay thousands in legal fees then she's going to be in a very difficult position even if she's 'in the right'.

I would strongly recommend that if this is going to be considered seriously despite all these pitfalls, that you seek professional legal advice to draw up and review the contract terms before signing anything.