Where it's saying 'knit up', it means the same as 'pick up stitches'. Are you familiar with that technique? If not, I'll direct you here
, about two thirds down the page there is a video that shows how.
The thing in your pattern about the 'valley'....between the stitches that have been on hold up till now (the instep stitches) and the sides of the heel flap that you are going to be picking up stitches along, it is common that a hole forms there. So this is why it's telling you to pick up one stitch in that gap before picking up the rest along the heel flap edge.