Highlander III: The Sorceror (or The Final Dimension) didn't happen.
Highlander II: The Quickening also did not happen.
If you insist on them having happened, then they were dreams Connor had while all goobered up in the Sanctuary.

As for the Sanctuary being on "fake" holy ground, it's not like there are many large, functioning monasteries around that would allow a secret society (that ISN'T the incumbent religion) to stash creatures that won't die on the premises. I'm guessing that the rogue Watchers who maintained the place didn't want to be THAT noticable, and set up the false front to hopefully discourage any passing Immortal to even bother coming in with murder on their minds.
[Incidentally, if the Sanctuary had been operating for centuries, how did they get by before modern drugs to keep the residents unconscious? What's wrong with just burying them - it worked for Nefertiri without any particualr side effects?]
Regarding holy ground, the very first time it was mentioned was by Ramirez, who only said that the only place an Immortal would be safe is there, and that no Immortal would violate that rule, because "it's tradition". No fire or brimstone, one jsut does not do it. It was in the movie universe though, but who knows? Someone told Ramirez of this rule, and it's not like anyone told the Watchers directly. :P
[Aside - I'm reading the 2006-8 run of Highlander comics, which has Fitzcairn appearing on a yacht formerly owned by the Cathoic Church, and therefore consecrated and essentially a mobile holy ground for him to hide on. Everyone respected it, but had he not told anyone, no one would have known.]
Frankly, I'm of the opinion that the Gathering, plus most of the rules of the Game were made up by some Immortals a very long time ago while they were sitting bored around a campfire some millenia ago. Not unlike most religions, the Immortals of the time tried to explain their nature by basically making up stories about it, which turned into legend, which turned into the culture they live by.
I can see some thoughtful Immortal coming up with the idea that EVENTUALLY there will be only one Immortal left, and that one would have the sum power of all the Immortals, and using that as justification to go a-hunting. Otherwise, why bother chopping heads off at all? The rush? Besides, with new Immortals popping up all the time, it's not like the Gathering is anywhere near unless that suddenly stops happening.
Mark
PS - People even MENTIONING that "Highlander: The Source" happened tend to be violently interrupted before they can finish typing abou