Steward Health Care System, once the largest for-profit private U.S. hospital network, received an ultimatum from its largest landlord: Pay rent or leave.

Medical Properties Trust, a real estate investment trust that owns 30 of the 31 U.S. hospitals operated by Steward across eight states, made the demand in a court where Steward has filed for Chapter 11 bankruptcy protection.

It's part of a dispute that's already stoking debate among lawmakers over hospital real estate ownership. The case also sheds light on the property structure behind medical centers, and how lease terms can disrupt the running and the bottom line of healthcare operators.

Medical Properties Trust alleges that Steward is still occupying hospitals across the country it owns without paying rent as Steward waits for the court to finalize its request to reject its leases at those medical centers.

“It is frivolous for the debtors to claim that they can continue to operate their businesses in Medical Property Trust's property, generate revenue for the benefit of the estate and secured lenders, but not pay any rent," attorneys for Medical Properties Trust argued. The REIT filed a preliminary objection to Steward's proposed lease rejection with the court this week.

The ultimatum comes on the heels of Steward alleging Medical Properties Trust hindered efforts to sell its operations to new owners through bankruptcy proceedings because the two businesses have "competing interests." Steward sought protection from creditors in May as it reorganizes $9 billion in debt, including $6.6 billion of long-term rent obligations owed to Medical Properties Trust, as it seeks to sell its operations and leased property at 400 locations with nearly 30,000 employees serving more than 2 million patients a year.

Some Steward hospitals faced severe maintenance issues since the company filed for bankruptcy. The issues include the failure of a heating-and-air conditioning system in Phoenix causing temperatures to near 100 degrees inside the hospital, forcing its temporary closing, and a bat infestation in a Florida hospital, according to the filing from Medical Properties Trust.

The landlord and tenant dispute sparked the House of Representatives in Massachusetts, where Steward once solely operated, to pass a bill limiting REIT ownership of hospitals now pending a state Senate vote.

With Steward being Medical Properties Trust's largest tenant and the REIT being one of Steward's largest creditors, the health and viability of both businesses are at risk with this being a "zero-sum game," said David Pratt, a Dallas-based partner at Bradley, a national law firm, who specializes in REITs.

"This is a big deal for investors; it's how they get their money back," Pratt, who is not involved in the Steward proceedings, told CoStar News in an interview. "They want to leverage the best financial settlement possible, with Steward wanting to sell their business operations and Medical Properties Trust wants a credit-worthy tenant that can uphold their lease obligations."

Steward Health did not respond to phone calls and emails from CoStar News seeking a comment. A Medical Properties Trust spokesperson told CoStar News that Steward is "wrongfully blaming" the trust for holding up sales when "Steward has refused to sell hospitals in order to extract value" from the REIT.

Steward Health had six hospitals operating in Massachusetts before being bought by private equity firm Cerberus Capital Management in 2010. Cerberus invested $800 million in the hospitals, including $400 million of upgrades, the firm said in a statement in April.

In 2016, Steward Health did a sale-leaseback of its hospitals with Medical Properties Trust that generated a "significant dividend" for Cerberus investors, Steward's CEO and Founder Ralph de la Torre and the Steward management team, Cerberus said.

With funding from Medical Properties Trust, Steward expanded from an 11-hospital system to a 37-hospital system operating in 10 states in 2017, making it the nation's largest for-profit private hospital operator. Cerberus sold its controlling interest in Steward in 2020 to de la Torre and his management team, Cerberus said in the statement.

Cerberus' investment in Steward was the subject of a Massachusetts congressional delegation’s probe in February over whether the private equity firm had a role in Steward's financial challenges. Cerberus "walked away with a profit of at least $800 million" when it sold its interest in Steward, leaving Steward "with massive, ongoing lease payments to Medical Properties Trust that are a major source of the hospitals’ financial distress," Massachusetts Democratic Sens. Elizabeth Warren and Edward Markey said in a joint statement in April.

In response to the allegations made by the senators, Cerberus executives said in a statement the firm has had nothing to do with operations of Steward since selling its majority stake. The firm did not immediately respond to an interview request from CoStar News seeking additional comment.

At the time Steward entered into the sale-leaseback with Medical Properties Trust, Cerberus said an independent third-party analysis concluded Steward had "more than ample assets, liquidity and cash flow to support the lease obligations."

The legal battle between Steward and its landlords comes as Massachusetts Gov. Maura Healey said she would seize control of Steward's St. Elizabeth’s Medical Center in Boston through eminent domain to help facilitate a transition to a new owner as the case moves its way through bankruptcy court.

Last week, the state offered Medical Properties Trust and its lender Apollo Global Management $4.5 million for St. Elizabeth's in Boston. The REIT rejected the offer, saying the amount significantly "undervalues the real property" underlying the hospital and is less than the property's annual tax bill.

Four other Steward-operated hospitals in the state, including Saint Anne’s Hospital, Good Samaritan Medical Center, the Holy Family hospitals and Morton Hospital, have reached agreements with new operators. The new agreements bring three new operators to the table, Gov. Healey said in a statement.

If the deals go forward, Lawrence General Hospital becomes the new operator of Holy Family hospitals in Haverhill and Methuen, according to the Massachusetts governor's office. Lifespan is expected to assume operations of Morton and Saint Anne's hospitals, with Boston Medical Center taking over Good Samaritan and St. Elizabeth's.

The sale hearing for Steward's assets in Massachusetts, Arkansas and Louisiana were postponed until Sept. 4. The potential deals need bankruptcy court approval before a transfer of assets can occur.

Not all of Steward's Massachusetts hospitals are expected to continue operating, according to the bankruptcy court, with U.S. Bankruptcy Judge Christopher Lopez recently signing an order outlining facility closing procedures at two Massachusetts hospitals, Carney Hospital and Nashoba Valley Medical Center, by month's end.

Judge Lopez also approved the stalking horse bid procedures for Orlando Health to acquire three Florida hospitals from Steward in a $439 million deal.

Medical Properties Trust made a $75 million loan to Steward prior to its Chapter 11 filing in May. Steward later claimed meddling from its landlord has prevented "the debtors from realizing, much less maximizing, the value of their assets," and "poses a grave threat to the success of the debtor's Chapter 11 cases," according to Steward's lawsuit filed against the REIT as part of the bankruptcy case.

The REIT claimed a deal stalemate wasn't tied to interference but rather an attempt by Steward to "force (Medical Properties Trust) to transfer real estate value to the debtors and their lenders as the price of allowing sales to go forward."

Medical Properties has been selling off pieces of its own portfolio not affiliated with Steward to generate cash and pay down debt. The REIT recently sold healthcare facilities in Colorado and Arizona, with expectations it will generate about $2 billion in cash this year through asset sales and other transactions.

The REIT's CEO Edward Aldag said during an Aug. 8 conference call that Steward’s bankruptcy and the potential closing of hospitals in the Boston area has made it difficult for the REIT to sell some of its other assets.

“The Massachusetts market has received the most public attention to date, which is particularly unfortunate as the noise in Massachusetts has slowed down sales process in other important markets,” Aldag said.

CoStar News' Staff Writer Andy Peters contributed to this article.