The guest and ourselves have reached an understanding so that we can now accommodate them. However I am unable to do anything as the dates are still blocked under their name as cancelled at a zero rate? Seriously... now I am in jeopardy of losing the booking in its entirety which makes no sense!
I am a little suprised as an established host, that you don't know that Airbnb takes host cancellation seriously and penalised hosts who cancel bookings.
One of those penalties is having the dates blocks as you have indicated by cancelling that they aren't available.
I suggest you call Airbnb explain the situation and see if they are prepared to be flexible.
I would also suggest you read through Airbnb Help Centre (with particular attention to host cancellations) to help you become more familiar with how Airbnb works.
Sadly you do not know how this platform works, @Prethi. You have made the mistake of many hosts thinking that you as the host can negotiate and modify confirmed reservations using cancellation as a process. You cannot. The automated system is set to "punish" host cancellations except under very specific conditions. This system was developed because of hosts that would cancel guests because they got a better reservation request and cause much guest distress.
Hopefully your communications with the guest occurred on the Air BNB system so that Air BNB staff can see the intention was to accommodate the guest. If so, then you should contact Air BNB on the phone and have a rep reverse host penalties including the blocked dates. Here is a guide for contacting Air BNB. Good luck and I hope this helps