Hello E. Vigilance:
I am NOT an attorney, I do not know if I am able to help you with "legalities" per se. However the situation you describe should be a serious problem for everybody.
The understandings must be in writing, documented so there is ZERO confusion what her responsibilites are and are not. It can be plain English, or in expensive old english hertofore, wherewithall etceteria (ie attorney). But if not written down she has no "rights" at all.
He said I could... I did not say that. Building owner wins...
She happens to be the "front" the only face the students see. But she gets no money, no salery, has no ability to earn it, if it is not written down in plain very simple language. The terms can change on a whim, there's no written contract...
The current owner gave your wife a "spy", someone to keep close track of what does and does not happen at HIS school. Certainly his right, but what happens if your wife makes a decision which conflicts with the owners assistants position/opinion?
We're going to wave the sign up fee on this student? We are going to wave the testing fee for this family? All kinds of scenerios which are administrative which conflict can occur. Needs to be written out.
As far as ranking, and lineage... there is no such thing as any governing laws about either one. No state or federal laws exist. If she is a part of a state or national, or internatiolnal martial arts association/federation of some kind they may have rules.
But if she is on her own, sets the rank standards she can do anything she wants. The two grades below yourself rule re: rank was taken from different political martial arts associations and efforts in Japan and Okinawa from the 70's and before.
But it is not some kind of international martial arts law... rank is entirely subjective. If your wife recognizes and acknowledges that a student has certain specific skills... why does the owner of the buildings opinion matter at all? Assuming it does for a moment... what happens when he disagrees with your wifes opinion... now what?
Sorry i don't have a specific answer to you excellent questions. In her place I would not teach anything without written documents. Guaranteed she'll be asked to sign a non-compete clause by the owner, for using his building... just in case. If she signs it <shrug> likely not enforcable but that won't stop him suing her, if/when they split and she takes the students with her.
Good question, hopefully others will chime in.