Why may the right hand sides in Chomsky Hierachy type 1 be larger?
It is not allowed to be larger, it has to be larger! If you allow the right side being shorter, you have context sensitive deleting grammars which have the same power as unrestricted grammars, thus leaving the realms of CSL.

The space limitation you mention relates to the automaton concept that is equivalent to context sensitive grammars, not the grammars itself.