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An error occurred while saving the commentRyan T Ralston commented
I had a similar problem. When moving a folder of files from a synced folder (with local copy) to a cloud based on-demand folder, I would get the greyed out Free Up Space option in the on-demand folder even though the local version was still there.
As a workaround, I did find that if I right clicked the recently relocated folder and selected "Always keep on this device" THEN right clicked, I would get the option to "Free up space."
It isn't perfect, especially if you have a mix of both local and cloud files in the transferred folder (it needs to download all the on-demand files when you select 'always keep on this device,' but nonetheless it does seem to get around the greyed out option.