In fact there is nothing wrong with the way you try to use RadEditor (except for that the scenario is less common than you assumed).
The issue you are facing has more to do with HTML and the way the browser parses and renders nested elements, rather than with the editor I prepared a simple page for you that demonstrates four cases:
The test page has 4 div elements:
one has a child div with text inside it – shows default browser
one has a RadEditor inside it – when the editor is disabled shows default
one has a RadEditor inside it – when the editor is disabled (its height is set
to 100%) doesn’t overflow its parent div
one has a RadEditor inside it – when the editor is disabled the parent div is
set a style of overlow: auto
Please examine each editor's settings and choose the
one that is right for you.