They've simply taken a risk. Very unwise of them before exchange of contracts, because this suggests the value of your plot of land as a PLOT is higher than the value of the existing site with your current house on it. Property Developers do this all the time. They are presumably intending to get OPP for a much bigger house on the site, which when built will enhance the overall value to more than what they are paying you plus the cost of the big new house.
They can do it. Equally you could pull out, apply for Planning Permission yourself, and sell it to a builder. Either seek advice from a Planning Consultant about unlocking the hidden value of your plot, or just get on your selling to your buyer.