@PrFi
So let me see if I've got this right. During their relationship he offered/asked to marry her and she turned him down. At the time of their separation he said he'd pay the bills until the youngest 'left home' but didn't specify exactly what that meant. To my way of thinking these are the only two 'faults' I see.
All that happened in-between was done 'in good faith' with both of them believing the relationship would last forever. Yes, perhaps her decision to become financially dependent on him was made 'in good faith' but the minute she felt the relationship wasn't working for her or she felt him 'pulling away' she should have started planning her financial independence, even if he did say "I'll take care of you". And yes, he should have spelled out exactly what he meant by 'the youngest leaves home'. Especially since in these days so many young people DON'T 'leave home' permanently when they go off to Uni. These days I think it's probably more the norm that they end up back at home at least until they've found a job that allows them to live independently. But I digress.
Does he 'morally' owe her the flat? No, he doesn't. He 'offered' her the flat in a manner of speaking when he offered to marry her and to vow 'with all my worldly goods I thee endow' or however it's phrased these days (assuming there was no mention of a pre-nup). When she chose to live in a cohabiting relationship without some type of legally binding cohabitation agreement rather than accept the protections that marriage gives she gave up the right to be 'owed' anything. If he chooses to give her the flat, he'd be doing it purely out of the goodness of his heart, not because he 'owes' her anything. And frankly, her attitude now means she's cutting off her nose to spite her face. And that's not his fault either. Personally, I don't think I'd speak to him about it. If he raised the issue I'd give my opinion, but I wouldn't start the conversation. And I certainly wouldn't suggest that he buy her anything.
When will women (and men) learn that in the end we need to be able to take care of ourselves, even if we don't 'have to? Either by continuing to work or by getting the education and/or the certifications to allow us to return to work if necessary. My friend stopped work to be a SAHP and her husband walked out leaving her with 2 small DC. Her bacon was saved by the fact that she had a professional degree and had kept her license current by working one day a week. She was able to return to full time work at a very good wage. I continued to work because we needed and wanted two incomes, but I also had the security of knowing that if DH had decided to dump me (or vice versa) I would still have been able to support myself and DC, even if at a 'smaller but still comfortable lifestyle'.
I wouldn't cut the ex off as a friend nor would I demand my DH do so. But I do think he now needs to be excluded from family events. He's no longer 'family' in the real sense of the word. See him when Sis is not around, but don't rub her nose in it by expecting her to sit down to dinner with him, even if she is in the wrong and being stubborn about it. Their DC will just need to get used to the fact that Dad is no longer a part of the 'family circle' even if he is still in the 'friendship circle'.