...pore strip...
You build the outside of the forms first.
Figure the height of the foundation and snap a line at that elevation. Nail a 1x2 at that line. The 1x2 is the pore strip, when you pore the concrete you level the top to the top of the pore strip.
When all is stripped away there is a 1x2 void at the top of the foundation on the outside.
In the old day the 3/4 sheeting would continue down and fill that void.
Now with 1/2" sheeting we install the plate out 1/4" over the void and the sheeting is extended down 1". That keeps the sheeting away from the concrete while giving backing for siding that is extended down to hide the void.
All that is in a perfect world and most times it works. With a situation like the OP has, there are a few things that might have been done when it was built.
The easiest would have been to change that wall from 2x4 studs to 2x6 or from 2x6 to 2x8 and make the house a little bigger on this side.
We are always at the limit to how close we are to the property line but that is only measure before the concrete is pored and most inspectors understand that crap happens.
The other more ugly fix is to get the diamond blade in the saw and make that void or make it deeper.
Or this might be the place to just add 1" of foam and make the rest a lot easier to hide.