What I would do is make it so the Elf characters can feel themselves becoming drowsy and slowly falling asleep but not instantly like the other characters. They see everyone falling asleep around them and have a little time to react but the power of the sleep magic is too strong even for elven blood to resist.

This way you keep the resistance to sleep intact and dont invalidate someones racial ability but at the same time get to make your mystical monster cool and powerful. I dont think anyone would object to this really, its not too dissimilar from very powerful darkness spells making even races with darkvision blind.