The community part of the Chapter area was settled in the late 1890s. Settlers were attracted by the rich basin for farming. Its Navajo name, Toneheliih, can be translated Collecting of Water in a Basin.

In 1930, a trading post and a day school were built. Before the Chapter House was built in the 1950s, community residents met by a trading post outdoors, and sometimes under trees.

An old BIA school was the center of many activities before it was converted for pre-school use. Sand Springs Farm, a 170-acre community farm, was established in 1961.

Due to the Navajo-Hopi relocation turmoil of the 1977 Settlement Act (PL 93-531) as amended by (PL 96-305) in 1980, Tolani Lake was reduced by almost half to its present-day size.

A distinctive part of the Tolani Lake community is the Naataanii’ Area which was named after Hosteen Natoni by chapter officials a long time ago. All of Hosteen Natoni’s children and grandchildren still live in the area.