According to Dralnu, the city had previously been the palace of the lich lady that reanimated him, which she just used to display her collection of undead. After he slew her, Dralnu transformed it into an actual city, giving his minions a sense of purpose. It is unknown exactly when and how the kingdom came into being, but it was likely ruled by Dralnu for centuries. The underground palace had not been seen since the lich lord's death.
When the panther warrior Marivel discovered the lost city, she learned from its ancient knowledge to become one of Urborg's most powerful necromancers and the leader of the Free Urborg resistance. Sixty years after the Mending, Free Urborg used Vhelnish as a hideaway, in spite of the fact that it was haunted by the Cabal Specter Urguros.