Both Peter and Paul were executed there in Rome by Emperor Nero, and at that time Rome was the Church Peter was ruling the entire Church from (remember, he was the head Apostle). So since Vatican Hill was the place they were martyred by Nero that became the place where they eventually created the Apostolic Palace and St. Peter's Basilica. The remains of Sts. Peter and Paul are entombed in St. Peter's Basilica and this is why the Pope, the successor of Peter, rules from there.