Informal settlements, shantytowns, slums, pit dwellings, and suburbanization have shaped part of Iran’s problematic and deteriorated urban fabric. A part of the city that faces issues such as economic, social, cultural, health, and educational problems, which in a way reflects urban poverty. The formation of these settlements, which are also considered urban management challenges, has various causes, making them complex multidimensional issues. However, one of the most important underlying causes relates to the governance of the country. National governance, especially in the field of the economy, plays a significant role in the creation, persistence, or resolution of this urban problem. Therefore, the governance tool, namely “law,” can be highly influential. Accordingly, in this research, through the method of collecting information and library documents, the research method of content analysis, and in combination with interviews with experts, urban managers, and residents during field visits, we seek to examine the legal causes related to the formation of this problem. Based on the findings of this study, the legal instrument, as one of the fundamental causes, has contributed to the creation or intensification of informal settlements in terms of formation, aggravation, persistence, and also their resolution. Therefore, by identifying legal gaps and refining them, an effective step can be taken toward solving the problem of informal settlements.