In this situation you need to decide on if you want to refund and what amount to refund:
-If you want to refund them in whole or in part but do not what to be the one to cancel:
Solution: you tell them to cancel and you can refund them after the stay through the airbnb system. However, all site fees are out of your control and they can contact Airbnb to see if they can get those back. They will be able to if they book another Airbnb listing those dates but if not it might go either way depending on the rep.
-If you do not want to refund them anything
Solution: Explain you can not cancel on the host end because the site treats that as if you refused the guest stay. However, the guest can contact Airbnb to cancel on their end and try to get site fees back.
Personal notes: Given the limited information to review, it appears as if they are entitled to a refund in full because a property was confirmed before it was known they would not have access to a vital part of it. There was no meeting of the minds on the issue so there was no valid agreement. The ruling would be a discounted stay where both agree or a cancellation on their end with full refund.
You'll be fine on cancallation though, never ever do it from your end. It's easily resolved with speaking with guests or a phone call.