The town had a long history. There had been a number of previous Imperial cities here, with their catacombs. There had been a mine here, digging out special stones. And the wells. There has been wells here for centuries, some with pumps.
One hundred and twenty five years ago the Earth shook. A good quarter of the then current city fell into the sink hole that resulted. Most of it was in one piece. People, being a resiliant lot, simple salvaged what they could, rescued those in the hole, and went on to rebuild their city. The city has done quite well for itself since then.
That has left The Pit to its own.
Eventually, everyone who was down and out found their way into The Pit. These squatters moved in to the surviving buildings. It was better than being out in the cold up above. Most of the buildings were pretty sound and their owners had given up claims soon after the rescues. As people moved in Pit, rather than deal with the city above, predators did the same. These predators (vampires and such) thought these forgotten people would be easy meals, as nobody would defend them. They were wrong. The locals, called Pitters by those above who even gave them a thought, were a tough bunch. They killed or kicked out everything that tried for an "easy snack" in the Pit. The Pitter’s numbers grew over time. Even slums and shanties develop businesses. A small but poor economy developed.
It was a rough life, but eventually some moved back into the city above. Seeking profit, new building and rebuilding in The Pit did occur, as the cheap land was eventually annexed. The Pit was once again considered part of The City. From a lawless no man’s land to the slum of slums, the transformation was not that drastic.
Note: The Guard is afraid to enter the Pit, except is massive numbers. But that is okay, the Pitters take care of their own and their justice is fairly swift AND even handed (being used to being treated unfairly, they are scrupleously fair).