The best thing to do first is to forget that there is a "the" suffix. There is no such thing in Turkish. There is a suffix for specific direct objects. "service" in this sentence is the subject, so it must be in nominative case. :)
Here, there is no object, and "in this restaurant" is just a prepositional phrase, so the noun is not in the accusative -- instead, it's in the locative, to express "in".
It could be. It isn't required here though. It depends if you are wanting to say "(the service in this restaurant) is very bad" or something more like "(in this restaurant) (the service) is very bad."