If you get close enough to Waukeen's Rest the fire events timer automatically triggers - no talking needed. If you then leave, the next time you go there, the inn is burned up and the councilor and her soldiers have left. Benryn (the trapped man) is also dead. Essentially, the building starts its burn progression just by being close, but you only get the quest if you talk to the guards.
So you do it in one run or the quest goes away.
Is it possible you got too close first?