A character reference addresses conduct and reliability rather than professional skill. Say how long and in what context you have known the person, and stay strictly within what you have personally seen.
Generally no, unless your contract or local law requires it. If you do give one, it should be accurate and fair — inaccurate references can create legal exposure in some jurisdictions.
Decline, or provide only the factual confirmation of dates and job title. A deliberately lukewarm reference is understood as a negative one by everyone reading it.
Yes. A reference without a verifiable contact carries very little weight.