I had a free space error as well. My drive had 3 partitions (free space recovery 8.8GB, reserved 9MB, and main 400GB). In disk management, I had to make the 400GB partition "active." It warned me that if that partition didn't have system files on it, the computer may not work.
I made it active. Everything seemed fine until the reboot. Error came up saying couldn't find bootmgr. So, I booted to the W8 DVD and it installed fine.
So, my guess is W8 was checking the "active" partition, which was too small.
THIS WORKED FOR ME. RESULTS MAY VARY.