Hi Karen, I notched mine there only because I was using a later year method of construction. The original Scotty teardrop was simply 1/2" sides with 1/4" plywood over them - no support structure. It probably wasn't needed, but I wanted to add 110v wiring and through over the roof would be best. I cut my sides down by 3/4" back to that notch which is where the framing for the door hatch was. I then wrapped with the 1/4" plywood and on top of that added 1x framing. This also allowed me to add TekFoil insulation over the roof which should keep it cooler in the summer time.
As far as keeping your's dry, if you are using today's hinges, you should not have any problem. Suggest you contact Mark aka Frank Bear. He builds and sells teardrops and has all the stuff for them. The Scotty hatch hinge is definitely a weak point. I made some mods by adding some weather strip on the inside of it, but not sure that is going to keep it water tight. When I had it out for the first time, having heard friends who'd just finished a rebuild of another Scotty teardrop had water pouring into theirs from that hatch door hinge, I put low residue duct tape over the top part of the door frame and let it go over the hinge. Mine stayed dry. I just bought a 4' piece of a garage door bottom strip and will remove the screws from the top of the door frame and affix that there. It will overhang the hinge so any water should flow right over it. That is my theory anyway.
Mark's website is:
http://teardroptrailerparts.com/ That is a picture of a 5x8' Scotty teardrop replica that Butch Starner built. Doors with opening windows on both sides. Very nice. We had it next to mine and it looks great. That is chrome siding. If you contact Mark, tell him Nancy in Delton recommended him! ;-)