The worst that will happen is that you earn zero money for the reservation.
Let’s say the guests show up and they are not easy going at all. They refuse to take the upgraded place blah blah blah.
Then I suppose they can report to Air that the place is not as advertised (due to paint fumes). Then Air can refund their money and try to relocate them. I guess if they technically “don’t stay” then they can’t leave a negative review.
Scenario 2: Guests aren’t easy going but they will only accept the upgraded place if they get a one night stay refund. That would mean you refund them one night, and you also have to pay your “friend” for the 1st night. You make no money, and guest still complains in the review. But at least you don’t have a “host cancelled this reservation” on your listing. That can really bring all future bookings to a standstill.
I am not even 100% sure of everything I am saying…and I am sure other hosts more familiar with cancellation processes (and ability for guest to leave a review) - they can chime in.
Hopefully your guests go with the flow. And if you present it as “hey…it’s your lucky day” maybe they will be very happy.