Hi Moe,
They were taking their chances, probably totally knowing it was for one room!.
Anyway let them cancel as it was clearly noted it was for one room.
Tell them to cancel and you can write to airbnb via the reservation booking on issues with this booking/refund etc and state they should not be charged airbnb cost or any costs relating to your personal cancellation policy i.e flexy, moderate, strict as the listing erroneously came up as entire place, despite the clear wording.
It would not be fair for either you or them to be charged.
Sure others may tell you a better way to make sure no one gets charged.
It happens
Mala