The research analyses the territorial governance of informal development in developing regions within a deregulated policy framework and a hybridisation of regulatory authorities. Grey governance is a collaborative and transcalar mode of governance between citizenry and the state, combining multi-level government jurisdictions with heterogeneous and specialised micro-regional community modes of governance. The research focuses on the co-federal collaboration between informal horizontal territorial regimes operating through customary land management systems (CLMS) in informal settlements in Cape Town, South Africa, and the formal vertical governance structure of municipal and provincial planning and policies. In this mode of territorial governance, the CLMS provides residents in micro-regions with accessible and transparent mechanisms to participate in the region’s governance through SANCO. Formal regulatory authorities, in various municipal and provincial agencies and specialised units take on a new role in selectively enforcing policy regulations based on the normative principles of good governance by negotiating compliance and compromises with community representatives to effectively manage certain challenging aspects of informal development. The CLMS becomes an extension of the state by ensuring partial compliance and self-regulation of policy and practices. This reduces the regulatory burden of local authorities and endears the state to the community as a primary provider, higher authority, and final arbitrator.