Unfortunately, if you have a free challenge, you will use it regardless of whether the person you are challenging is within reach of you normally.

The reason being is: free challenges are designed to be used at the beginning of a ladder, or for new players on a ladder, in order for people to find their appropriate position quicker. 

Players with free challenges should be encouraged to use them to find a comfortable position on the ladder from which to attack the top.  If they are already in that comfortable position, then they clearly no longer need the free challenges to find it, and keeping hold of the free challenges could put them at an unfair advantage in the future.

So it's a "use it, or lose it" philosophy!

You should note that the owner of a ladder can add and remove players' free challenges, so it may be worth asking the owner to give you an extra free challenge so that you don't lose it.