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Well, you could do it this way, but I suspect that HMRC might challenge the valuation. Were the whole building all residential that approach might work, but with an element of commercial premises that routine won't wash.
If both parents receive the rent which would be the case in a Joint tenancy [the legal term for joint ownership] then they would both be entitled to LR. LR is, of course, not always the maximum of 40K, but depends upon the actual rental received.
You are correct; you can have AEA and Lettings Relief. What you cannot have is AEA and Entrepreneurs' Relief; you cannot have both. This could cause a significant difference between you father and his spouse in their CGT affairs as she was not the business person in the matter. My mix up, sorry.