Yes Rik this is a mk 3 commando. the seal supplied is neoprene and once pushed in past the circlip groove becomes loose. The oil leak is when the engine wet sumps, which is every time it sits for any length, oil seeps past the OD of seal from engine over filling the primary. The seal supplied is marked 44.46 X 30.16 X 4.76. That should be imperial 1 3/4 X 1 3/16 x 3/16. I can't measure the OD in crankcase as the shaft is in the way and anyway its the inner half that's the problem and could only be measured if the engine was stripped and bearing removed. I have measured that a seal somewhere around 6 mm wide will still go in and if its a steel bodied seal and loctited in might do the trick. Your fix milling the case is they way to go if the engine needs stripping, however I want to avoid that as it is a good running bike. The other way to reduce the problem is fitting a anti drain valve between the oil tank and pump as these bikes don't have a valve so I am told. I will see what size seals are available here first before taking the next step. Fingers crossed.
I would try Locktite 510 flange sealant I have used it several times for jobs such as this, it stays soft until under pressure, if you have a big gap then I think you should try and shim it first.
The housing needs looking at carefully...mine had ended up as an elliptical quartic plane curve in cross section...it was never going to be possible to get anything to sit square and central in it :grimacing:
