this sounds dodgie, dodgie, dodgie!! If I was put in this situation I would have been on the phone asking this instructor for references to the CAR, CAO, etc. that would make this flight legal. Signing a MR is a big responsibility, I'm sure if something happened to this chap, YPJT would have been asked allot of questions (possibly in court) about the condition of the aircraft prior to the flight and could and land in hot water.
I, personally will never sign an MR for another pilot. It's the responsibility of every PIC to ensure that the aircraft is airworthy before they fly it. I don't want to be dragged into an ATSB or CASA investigation. If they can find the slightest thing wrong with that aircraft it will all come crashing down on MY HEAD. The same goes for fuel, never take the word of the previous pilot to what should be left in the tanks. (I digress but I've made my point)
Always think about the outcome incase the worst happens and never put yourself in a position where it'll be your @rse on the line!
I'll let the instructors answer the other questions about training areas etc.
So YPJT, did you end up signing the MR?